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Home Equity Lines of Credit: Is there a BETTER WAY to Deal with Your Debt?

“Unlock your home equity!”
“Need $30,000 or $300,000? A home equity loan is the answer.”
“Home equity loan? Let us show you how we can help!”

The ads scream from city billboards and all over the web (as well as in our local newspapers and on our television screens), clearly illustrating the popularity of (and intense demand for) home equity loans and lines of credit. The COVID Pandemic and the sharp increase in the value of homes and condominiums over the past year has only accelerated this demand.

Home equity loans allow a homeowner to borrow money by using their property as collateral. A home equity line of credit is a cross between a personal line of credit and a second mortgage. Your home is collateral for the loan. You do not have to draw the money until you need it. You can draw all or part of it at any time and pay some (or all) of it back as you wish. Think of these types of loans as low-cost revolving credit.

This option could provide desperately needed cash to pay down any debts you might have that carry higher interest rates. But borrower beware! Home equity lines of credit are not like other loans:

  • Unlike your primary mortgage, home equity lines of credit are “demand loans” – your lender can demand repayment in full at any time
  • There are fees charged for setting up a home equity loan, including appraisal fees, legal fees, disbursements, and HST (most of us forget about these fees when shopping for a loan)
  • Home equity lines of credit are not designed for anyone who is having a challenging time controlling their spending – the temptation to dip into the line of credit whenever some money is needed for a purchase could end up adding a sizable amount to an existing mortgage

You will also need to be aware that if there is a rise in interest rates down the road (a viable scenario as Canadians continue to rack up astonishing amounts of personal debt during this pandemic) it could put your now-profitable piggy bank of a home “under water” (that occurs when the mortgage on your home is higher than the actual resale value of the property). That is a scenario you want to avoid at all costs.

The Canadian Government Institutes Protective Measures for Consumers

The past decade has been a comfortable one, in many ways, for Canadian homeowners. We have enjoyed unprecedented low interest rates and have taken advantage of the convenience of using our homes to finance our lifestyles. Until the Federal Government decided to put a stop to this behavior by bringing new mortgage rules into effect on July 9th, 2012. As of that date, the maximum amount a Canadian family could borrow when refinancing their house was reduced from 85% of the value of the home to 80%. This effectively means that less money was available to us through our home equity lines of credit. Since that time, the government has instituted some additional mortgage “stress tests” including one on June 1st, 2021, that made it tougher to qualify for a mortgage.

This all means that some Canadians will no longer be able to use a portion of their available home equity to pay off unsecured debt. It also means that, as homeowners, we are going to need to get our financing and budgeting in order quickly.

So, what other options do we have to clear up a large pile of debt if we have lost the ability to use our home’s equity to finance our daily lives?

The Power Of The Proposal

Rather than go further into debt by arranging a home equity line of credit, consider a consumer proposal. Proposals are embraced by educated consumers who may be struggling to meet their financial obligations. They understand the importance of getting rid of debt as quickly as possible and opt to work with a Licensed Insolvency Trustee (also known as a “LIT”) to prepare a fair and reasonable settlement offer to their creditors so they can avoid a bankruptcy scenario.

How A Consumer Proposal Works

First, you work with a federally Licensed Trustee to determine how much you owe, how much you can afford to pay towards your debt each month, and how long it will take you to pay off an agreed-upon amount. Then the Trustee submits your proposal to your creditors. If a simple majority of your creditors (51%) accept the offer, then all your unsecured creditors are obliged under the BIA (Bankruptcy and Insolvency Act) to accept the offer.

Here is another benefit of filing a Proposal: It immediately stops all collection efforts and legal actions by your creditors, including lawsuits, asset seizures, and wage garnishments (without having to file for bankruptcy). This type of debt relief is an excellent alternative to a home equity loan, and you are shedding debt rather than taking on more debt.

If you have been having difficulty arranging for a home equity line of credit (or want to get out from under the burden of your present home equity line of credit) and are desperate to deal with this rising debt load, consider a Consumer Proposal as a solution to your debt problems.

We can provide you with guidance and advice at any of our more than 80 offices across Canada. Please reach out to our licensed professionals today by clicking on the FREE CONSULTATION button, below, or give us a call. We will work together to find the right solution for your debt pressures.