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.

 

 

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

1. 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.
2. Gather copies of credit card statements, loan agreements, mortgage documents, and any document supporting the establishment of a debt.
3. Gather evidence of your pay (pay stubs or bank statements if you receive direct deposit pay)
4. Call your local mortgage professional and make an appointment for a debt consolidation meeting using your home equity.
5. Be prepared for a home appraisal, a verification of debts, and sometimes a lawyer to close the deal.
6. 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!