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Using Your Home Equity to Consolidate Debt

home-equity-consolidate-debtHome values across Ontario are up, and in the GTA specifically – they are booming. With home values steadily increasing year after year and mortgage interest rates at historical low, how can you use your home equity to consolidate your consumer debt?

If you’re one of many Canadians with high credit card debt, unsecured lines of credit and personal loans that are at their limit, you aren’t alone.

Can my home equity help?

If you own your home, and have seen its value increase over the past few years it is very possible that your path to debt relief lies within your own walls.

A debt consolidation that leverages the equity in your home may be a good solution for dealing with your debt. Refinancing and consolidating your debt within a mortgage means that you will pay a lot of interest on that loan over the course of your mortgage’s life. It will certainly free up cash flow, as the payment on the consolidated debt is likely to be much lower than the payments on the high interest consumer debt.

How does it work?

  1. There must be sufficient equity in your home to enable you to consolidate all of your debt. A partial consolidation will do little to provide you with the relief that you need.
  2. The new mortgage payment must be affordable and not result in you defaulting on your mortgage. Linking your home equity to your debt means that if you can’t make the payments you could lose your home. (Remember to factor interest into your calculations to ensure you can in fact make the payments).
  3. Once you have consolidated your credit cards and unsecured lines of credit you need to close those accounts. This is really the most important part, get rid of the debt on the credit cards and then get rid of the credit cards. This will ensure you stay on your path to freedom debt-free future. If you absolutely need access to credit, reduce your access to one card with a low limit.

With your consolidation loan in place, you should direct a portion of your increased cash flow to savings. It’s important to build up an emergency fund so that you don’t need to borrow money to deal with any unforeseen expenses. If you follow these steps, a debt consolidation leveraging your mortgage could work well the get you on the path to a debt-free future.

Not enough equity?

If you find out that you don’t have enough equity to deal with all your debt or your credit score is stopping you from qualifying for a debt consolidation, there’s still a way. This might be a good time to call in the professionals. A Licensed Insolvency Trustee and a mortgage broker can work together with you to eliminate your debt.

Licensed Insolvency Trustees are responsible for looking at all of the options for dealing with debt. Mortgage Brokers may be able to negotiate the refinancing of your property to release what equity is there. Even if it’s not enough to pay off all your debt, it could be enough to settle your debt through a consumer proposal.

There are many paths to living debt-free. Many people are reluctant to look at these options as they are afraid of damaging their credit rating. What many people forget is that the principle reason to get a good credit rating is to qualify for a mortgage.

If you already own a home and have a mortgage, a temporarily reduced credit score while you restructure your debt is not likely to cause you any problems in the long run. Being debt-free and a homeowner is far more important than having a good credit score but carrying too much debt. If you’re not sure whether or not you should leverage your home equity to consolidate your debt, contact a Licensed Insolvency Trustee today.


Brian McIlmoyle

Brian McIlmoyle is a Licensed Insolvency Trustee working in our Mississauga and Toronto Danforth offices. Brian worked in many industries prior to becoming a trustee including construction, manufacturing and serving in the military. His extensive background helps him talk with people about their financial problems and find an approach that works for them.