Canadian Household Debt
Debt consolidation
using home equity isn’t new, but it’s become more important as our financial
norms have changed over the years. In 1980, the ratio of household debt to
personal disposable income was 66%; that ratio recently passed the 150% figure (Statistics
Canada 2011). This
means that households owed more than $1.50 for every dollar of disposable
income.
Why Canadians Borrow
According to a 2012
Bank of Canada report, Canadians shoulder debt for a number of reasons, including increases in
day-to-day expenses, to pay off other debts, for leisure, health care, or to
accommodate changes in their household. Increased mortgage payments and
spending on education round out the list.
That drain on cash
flow for Canadian households is significant. Interest rates charged on many debt
instruments can range from 2.69% to over 30% (Globe
& Mail 2015).
Credit Cards (bank) |
04.50% (low) |
15.75% (high) |
Credit Cards (retail) |
12.00% (low) |
32.00% (high) |
Line of Credit (unsecured) |
05.50% (low) |
12.60% (high) |
Bank Loan (non-auto) |
13.25 (low) |
14.25 (high) |
Bank Loan (auto) |
07.95% (low) |
09.00% (high) |
Line of Credit (secured) |
03.85% (low) |
10.25% (high) |
Residential mortgage |
02.69% (low) |
02.79% (high) |
Comparing Rates on Canadian Household Debt
In examining debt
charges in the above table, it is increasingly obvious that residential
mortgage rates and secured lines of credit are the most cost-effective way to
manage consumer debt. For example, a $2,000.00 bank credit card balance can
cost you upwards of $315.00 per year, but that same debt converted to home
equity can cost as little as $53.80 per year. The savings are even more
dramatic if you compare retail credit card balances, bank loans, unsecured
lines of credit or car loans.
The Advantages of Debt Consolidation Using Home Equity
- The lowest interest
rates available for household debt management.
- Available
in lump sum form to consolidate existing high-cost debt.
- Available
as a secured line of credit (acts like a credit card with a ridiculously low
interest rate).
- Amounts
available are based on the value of your home (usually your biggest asset).
- Can
be paid off with the sale of your home, or any way you choose.
- The
line of credit option provides a permanently approved loan as the balance is
paid down.
- Can
be a single, low-cost solution that frees up cash flow and provides access to
funds when you need them.
How to Consolidate Your Debt Using Home Equity
- Make
a list of all outstanding debts – if you plan to consolidate, list everything
you owe, the balances, the interest rates you pay, and any annual fees
associated with the debt.
- Gather
copies of credit card statements, loan agreements, mortgage documents, and any
document supporting the establishment of a debt.
- Gather
evidence of your pay (pay stubs or bank statements if you receive direct
deposit pay)
- Call
your local mortgage professional and make an appointment for a debt
consolidation meeting using your home equity.
- Be
prepared for a home appraisal, a verification of debts, and sometimes a lawyer
to close the deal.
- The
lender usually takes care of paying off the consolidated debts for you.
If you’re considering debt
consolidation using home equity, an experienced mortgage professional will find
the lowest rate with the most favourable terms; lowering your outgoing monthly
cash flow and relieving the financial pressure!