Debt has started to rise again for Canadian households and many are wondering if they should not be tapping into the equity in their property to settle their creditors. Attention danger !
Indeed, this solution, far from being a panacea, must be handled with care, warns Sylvie Desautels, authorized insolvency trustee at Raymond Chabot.
However, it seems very attractive to many consumers, and for good reason: the interest rates are much lower than those of credit cards and personal loans, and by being spread over 15, 20 or 25 years, the monthly payments are also more affordable. But what sounds like a good idea could actually trap us in debt for a long time.
Rising interest rates
But first, what is a mortgage refinance? It involves renegotiating your mortgage loan and using the net value (equity) of your property to increase the total amount of the loan. With the amount released, you can, for example, carry out renovations or consolidate your debts. You can check it using the FHA Loan Calculator.
Sylvie Desautels explains that she often sees clients in her office who plan to proceed in this way in order to have access to an amount of money that will be used to repay all their creditors at once. But this solution is less advantageous than it seems, and above all is not suitable for all situations.
The licensed insolvency trustee sees three major dangers in this. The first and not the least: even if the consumer pays his debts with a lower interest rate, the repayments are made over a very long period. In the end, this will generate a costly interest bill.
“In addition, if before the pandemic mortgage interest rates were very low, they are currently on an upward slope. We can’t predict how high they will go, but it will necessarily increase the monthly amount to be repaid,” she says. In other words, even if we thought we would lighten the burden of our debts, we will on the contrary increase them.
Risk of relapse
Another pitfall that could arise on our way: the risk of recidivism. “By repaying all our debts, we create a false sense of security. Result: we start spending and using our credit cards again. We therefore aggravate our situation and in the event of default, we could even lose our house, ”underlines Sophie Desautels.
Finally, we also expose ourselves to the danger of finding ourselves stuck indefinitely in the spiral of indebtedness, because we have not solved the problem at the source.
“To end your debts, you have to change your consumption habits, reduce your expenses in order to be able to live on the income earned and avoid using credit,” she recommends.
Do not hesitate to seek help from insolvency professionals or consumer support organizations if necessary.
- To reduce expenses and find the way to financial health, there is no secret. The good old fashioned way is to make a budget based on your income and stick to it. Several organizations such as the ACEF, present throughout Quebec, offer help and free consultations to build a budget and solve debt problems.
- When they are unable to obtain refinancing from their bank, some then turn to another financial institution and take out a second mortgage on their property. Be careful, because the interest rates for this one will generally be higher and you also end up with another monthly payment to make.
- Mortgage refinancing may be appropriate in cases where you are going through a temporary bad financial patch, due to job loss or separation, for example. If the problem has been identified and a return to stability is imminent, then refinancing may be an option. However, you have to do your calculations well to know if this is the most advantageous solution.