Very few people could have predicted the pandemic housing boom in Canada over the last year and a half. Homeowners have found that the equity in their homes has increased substantially.
This has led many to wonder if they should utilize that equity to pay down their debts. But where do you start and what are the different options available to you?
In this podcast Licensed Insolvency Trustee, Derek Chase talks about refinancing your home to avoid debt problems. The following topics are explored:
- Refinancing your home with your mortgage lender
- Taking out a second mortgage
- Home Equity Line of Credit (HELOC)
- Risks involved in using the equity in your home
Licensed Insolvency Trustees should be your first point of contact when you are looking for help with unmanageable debt. They are federally licensed and regulated which ensures you get unbiased advice.
Read the Transcript
Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay.
In today’s show, we’re going to talk about whether you should refinance your home to avoid debt problems or consider a home equity line of credit, or what is the best thing for you to go about doing.
My guest today is Derek Chase from Derek Chase & Associates in Campbell River, British Columbia. Derek, great to have you on again.
Derek Chase 0:32
Thanks very much, Wayne, it’s a pleasure to be here.
Well, Derek, just before we started recording, we were actually talking about how you’ve been in the industry for quite a while. This show is all about helping Canadians that are in debt and I’m sure you’ve seen just about every possibility of how people get into debt problems.
Derek Chase 0:49
It’s true, there’s a million different reasons that a person can get into financial difficulty. The federal government does try and keep a handle on some of the trends and ways that people can get into trouble. But there is no shortage of different possible twists and turns where people can find debt problems and financial hiccups. So it’s really good for this podcast to get some of the facts out there and some of the different nuances and options where the public can look to for help.
Yes, and I think what’s really great is that emotionally, it can help so many people because when you get into these situations where you don’t know how to get out – it’s just you’re dug into this deep hole of debt, and it can be terrifying. You’re losing sleep, you’re probably getting phone calls from bill collectors, the stress alone – I can’t even imagine what people go through.
Derek Chase 1:47
Yes again, very much true. I was just talking to a lady yesterday who was visibly shaken by her financial situation, losing sleep, you know – very shaky. And as we progressed through the meeting, and just provided her with a lot of information, you could see that stress and anxiety just slip away. And she was able to leave with a solid plan for the future. And I think she would have slept a lot better that night.
I can just imagine. So that’s really, as you mentioned, this is what the show is about. It’s about helping, you know, real people that are in these situations. And really, a lot of times it’s no fault of their own. You never know what’s going to happen – and all of a sudden. I think I don’t even know what the stats are, but it’s a very high percentage of Canadians that are like one paycheck away from having major financial problems.
Derek Chase 2:37
That’s true. I don’t know those specific stats myself. But you see that in different media sources from time to time where a fairly significant percentage of people are just that one, one interruption of income away from having true debt problems. So it’s definitely good to get more information sooner rather than later.
Yes, terrific. Well, why don’t we dive into today’s topic? We’re talking about people that are in a bad debt situation, and maybe they have their home. And they’re probably wondering, should you refinance your home to avoid debt problems?
Derek Chase 3:15
Well, certainly with the rise in real estate prices over the last several years, that is more of an option than it used to be. I can remember times where it just was impossible to go to your home for refinancing, because the equity or the value wasn’t there.
But currently, there’s a tremendous amount of value in people’s homes. So it’s natural to look at that as a possible source to deal with your unsecured debt. And there’s a variety of different ways that you can access equity in your home. It’s a bit of a journey to explore all of them to determine which one is right and which one is not going to fit or just simply be too expensive to do.
I would imagine there’s a lot. It’s not one solution – that doesn’t meet everybody’s needs.
Derek Chase 4:05
100% Yes, you definitely need to look at each of the different options for refinancing in order to see which solution would be helpful for your own particular circumstances. I think the first place to go whenever you’re looking at getting some help with equity coming out of your home to deal with your unsecured debt is to look at where your mortgage is now. If it’s with one of the chartered banks, and perhaps your term is coming near for renewal, simply have the discussion as to whether they would advance more money than they currently have. I think that’s definitely the first step.
Okay, so contact your bank and even if it’s not a traditional bank. I’m assuming there’s numbers they would call to find out. You mentioned, if you’re coming up for renewal, is refinancing an option?
Derek Chase 4:54
I think so. And it’s definitely worth the conversation and a lot of people also lately have used mortgage brokers to help with that potential shopping for the renewal or remortgage. And it’s worth looking at just because of the numbers these days allow for that potentially extra pull out of your house equity when your mortgage does come up for renewal.
Now a lot of people have made a fair amount of money with their real estate, especially the last 18 months. In one year we’ve seen a lot of growth when it comes to real estate. So there may be enough in that, to maybe leave them with a down payment. I’m sure the bank would rather just renegotiate some kind of a deal with them. That’s my assumption, but I’m no banker.
Derek Chase 5:37
Yes, it’s definitely possible. And that’s why I say there’s a variety of different routes that a person could go. Another one that comes to mind is putting a second mortgage on your property. Second, mortgages get to be a bit more tricky, because typically, you’re looking at a Class B lender or a second tier lender, and the interest rates start to get higher.
That’s where I think people need to really be cautious in that setting, because in addition to higher interest rates, some of those lenders also wack on a really high administration fee to pull out more money. And the combination of those two things makes it a very expensive way to pull money out of your house.
Yes, that’s a great warning. Is there a flat fee for refinancing or do you have to worry about the fees?
Derek Chase 6:25
If it’s with your first primary mortgage, I don’t think there’s any additional fees. But when you go into that second tier of lenders, there can often be administrative fees that are substantial. So definitely, you want to watch for that. And if the interest rate gets too high, again, it’s something that you might not want to go ahead with.
On one of the podcasts, I was actually surprised to hear how high some of these other lenders can go when it comes to little mini loans, if you will. I was really shocked. So is there a safe – 5%, say under five? Or do we even know what a mortgage is right now – what two and a half?
Derek Chase 7:06
There can be a tremendous variability in those interest rates. And the lender is always going to look at the risks involved and what type of property it is. So there’s a lot that goes into that particular interest rate that you might get, particularly if it’s for a second mortgage.
Another way that has become popular to pull money out of your house is through a home equity line of credit, which is a product that the banks are offering. It is a line of credit that is secured against your home. And that can be useful because it can be just there and available for you. You pull on it like you would on a line of credit, but it is secured by your home. So that’s another product that a person can explore. And that often would have a more modest interest rate, I think then potentially a second mortgage.
Yes. Is this a good idea? Maybe going in for the home equity line of credit? I would think the interest rates are always better. I remember we’re looking at doing some renovating. And they said, Oh, definitely use the home line of credit, as opposed to – if you didn’t have debt, and you put down a line of credit. If you didn’t have a mortgage and went for a line of credit, it’s much higher.
Derek Chase 8:14
You know, I think you could debate both sides of that question as to whether a home equity line of credit is good or bad. And I think it comes down to whether or not you have the discipline not to just use it for anything and run it up. Because there is the risk that if interest rates rise or your property actually goes down in value, there can be some complications there.
So just like with any financial matter, if you’ve got to have the discipline to be careful about it. Then I think a home equity line of credit can be great. You know, we have seen some causes for financial difficulty, for example, like we touched on earlier, where one spouse, unbeknownst to the other spouse, starts spending on some area that is just not good. You know, it could be a gambling situation or something else – and that home equity line of credit could be tapped into very easily to do that. But everyone that’s involved with the homeownership is on the same page and disappointed about it. It can be an excellent way to utilize the equity in your home.
So as an LIT – somebody comes into your office and says okay, I’ve got this much debt, you obviously ask, do you own your home? How do you look at how an LIT helps solve the debt problem for homeowners?
Derek Chase 9:36
You know, it has become a little more complicated with the rise up in real estate values because creditors – unsecured creditors have the right to get paid if a person has an abundance of assets. Where we see some homeowners get into problems is that although they do have significant equity in their house, they still can’t seem to qualify for even a high interest mortgage. Or they want to keep their house they’ve got, they like it that there’s no other place they can really go to. So they don’t want to sell it to pay off their debts. But they can’t qualify to refinance or to put more financing on it.
So in those circumstances, what we’ve been able to do is utilize a Consumer Proposal to make a proposal to their unsecured creditors for sometimes a full payout over time. It just allows them to keep their house and control their debt, their unsecured debt by consolidating it into that Consumer Proposal process.
Can you explain if somebody has just heard the term Consumer Proposal for the first time? What is it?
Derek Chase 10:45
A good question. A Consumer Proposal is a government of Canada federally approved program where you can make a proposal or offer to your unsecured creditors for a certain payback over time, in full settlement of the debt.
It’s become a very popular way to consolidate that across Canada, and is very, very useful. The creditors seem to like it, people seem to like it, because it boils down to one payment that fits your monthly budget with either zero interest or very modest interest if you have lots of equity in your house. Over the last couple of years, it’s actually outpaced the amount of Bankruptcy filings across Canada. So that’s an indication of how popular it’s become.
Well it’s good for people to know that there is an option. I would imagine you’ve seen a lot of people who are in that situation we were talking about earlier – where they can’t sleep, they know the debts are getting worse, it’s growing. They don’t know where to turn.
So then they start thinking, well, I guess we better just sell the house. And then of course, what do you do? Because rentals these days are almost impossible to find in many cities across Canada – and to buy another one, same thing.
How are you going to do that? How are you going to refinance all those kinds of options? So good to know that there are different ideas. And when it comes to dealing with a Licensed Insolvency Trustee, we know that people are listening to this show, they understand you’re governed by the government, right?
Derek Chase 12:14
We are regulated. We’re firstly licensed by the federal government as a Trustee -so we’re a trust. A Licensed Insolvency Trustee is the only one that can actually file a Consumer Proposal on your behalf.
So firstly, you’re licensed and then secondly, we’re also regulated through the federal law. So the federal government monitors what we do. They come in and visit our office, they audit our trust bank accounts. It’s a good oversight procedure for the protection of the public. And it’s one area of government, I like to say that does a pretty darn good job in what they do.
That’s good. And when we were talking about a Consumer Proposal, let’s just use some numbers for an example here. If somebody is to make math easy $100,000 in debt, when you go to do a proposal like that to the end up repaying the entire $100,000 or can you renegotiate where they only end up paying $25,000? Is that under the same umbrella as a Consumer Proposal?
Derek Chase 13:16
That’s an example of a Consumer Proposal where someone might offer $25,000 paid over as long as 60 months to eliminate that $100,000. Now that’s more applicable if a person didn’t have a house with any large amount of equity in it. And that I think is the majority of situations that we deal with – it gets more complicated. If there was a large amount of equity in their home, then they wouldn’t be able to offer $25,000 on $100,000. It’s just not logical. The unsecured creditors would say no to that, and the person would have to increase their offer because of their home equity in their home.
So every situation is different, every situation needs to be looked at. And let’s give you the final word. What’s your final word of advice regarding this topic?
Derek Chase 14:09
I think the first step is to check with where your mortgage is right now and see if you can renew and increase without any penalties or problems. And if that’s not the case, then you might want to talk to a Licensed Insolvency Trustee just to see if there’s a smoother way to deal with your unsecured debt which allows you to stay in your home.
And we should mention Derek and his team. They do a free consultation for the first consultation so you can contact him through bankruptcytrusteebc.ca.
Derek, thank you very much for all the information today.
Derek Chase 14:42
You’re welcome. It was my pleasure.
Well, thanks again, Derek Chase. And that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcasts from – but of course for more information you can always check out debtmatters.ca Thanks for listening.
About Derek Chase
Derek Chase is a Licensed Insolvency Trustee in British Columbia. He has been helping individuals and corporations restructure their debt since 1997. His areas of practice include personal and corporate insolvency including Consumer Proposals and Bankruptcy. The best part of his work is to be able to witness lives change for the better when the heavy burden of unmanageable debt is lifted.