How to manage your debt effectively
It seems as if the debt-to-income ratio is always in the headlines. Just recently it was reported that the ratio edged down to 177.1% in the second quarter of this year, from 177.5% between January and March. The number means Canadians owe $1.77 in debt – including mortgages and consumer debt like credit cards – for every dollar of disposable income. In 2016, the ratio was sitting at 167.3% and increased each year until October 2018, when it started to come down, thanks to both a slowdown in borrowing and healthy income growth.
While increases worry some policy-makers, studies have shown that consumers are able to pay their debts reliably. Low-interest rates on mortgages, for example, have allowed consumers to pay down more of their mortgage principal, with payments split almost evenly between interest and principal.
But for some, the debt load can be unmanageable and then the search is on for a solution. Many are familiar with advertising from Debt Settlement services that offer to settle a consumer’s outstanding debt, for a fee. If you’re considering these options, make sure to do your research and find a reputable company to work with.
There are also not-for-profit credit counseling services that offer Debt Management and Consolidation Programs that can help you negotiate a repayment plan of 100% of your outstanding debts through something called a debt management plan. They cannot offer a debt settlement because they do not settle your debts for less than you owe. If you only have a few debts, a debt management program may be a good option. Seeking their help may potentially help with your credit score.
For larger debt loads where there is equity available in your property, debt consolidation may be an option. Mortgage professionals may be able to consolidate debt with a refinance.
When arranging a consolidation mortgage loan, the amount of the mortgage principal may be increased to pay out the total amount of debt. This becomes part of the mortgage commitment and a condition of the mortgage loan. On closing, your lawyer will disburse the funds to your creditors and register the new mortgage.
What you need to know
A refinance alters the terms and conditions of your mortgage. For this purpose, you are increasing the amount of your mortgage to pay off debt. Your mortgage payment may or may not increase, depending on a number of factors, and you may incur a penalty to break your existing mortgage if you are refinancing midterm. Depending on your current mortgage, you could be paying off the refinanced debt at a much lower interest rate, which could save you thousands of dollars in interest in the long run.
It’s always a good idea to review your mortgage with a mortgage professional, not only when you’re considering consolidating debt. A mortgage professional can shop the rates for you and get you the best deal, tailored to your particular situation. Then, if you decide to switch lenders, there are no penalties at renewal time.
One of these options may be the perfect solution if you know someone who may be struggling with debt. Contact Arise Mortgage for a free consultation!