Debt is starting to rise again for Canadian families and many are wondering if they should not take advantage of the equity in their property to settle their creditors. Beware danger!
In fact, this solution, far from being a panacea, should be handled with caution, warns Sophie Desautels, certified insolvency trustee at Raymond Chabot.
However, it appears to be very attractive to many consumers, and for good reason: interest rates are much lower than those of credit cards and personal loans, and spread out over 15, 20 or 25 years, monthly payments are also quite affordable. But what seems like a good idea can trap us in debt for a long time.
high interest rates
But first, what is a mortgage refinance? It involves renegotiating your mortgage loan and using the net worth (equity) of your property to increase the total amount of the loan. With the released amount, you can, for example, make renovations or consolidate your debts.
Sophie Dessautles explains that she often sees clients in her office who plan to proceed in this way in order to access a sum of money that will be used to pay off all of their creditors at once. But this solution is less useful than it seems, and above all is not suitable for all situations.
A licensed insolvency trustee sees three main risks in this matter. The first but not the least: even if the consumer pays his debts at a lower interest rate, the repayments are made over a very long period. Ultimately, this will create an expensive interest bill.
Additionally, if mortgage interest rates were too low before the pandemic, they are currently on an upward slope. We cannot predict how high it will be, but it will necessarily increase the monthly amount to be repaid,” she says. In other words, even if we think that we will reduce our debt burden, we will increase it on the contrary.
risk of relapse
Another dilemma that could arise on our way: the risk of recidivism. “By paying off all our debts, we create a false sense of security. The result: we start spending and using our credit cards again. Therefore, we are exacerbating our situation and in the event of default, we may lose our home,” emphasizes Sophie Desautel.
Finally, we also run the risk of finding ourselves stuck indefinitely in a downward spiral of indebtedness, because we did not solve the problem in the first place.
“To end your debt, you need to change your consumption habits and reduce your expenses so that you can live on earned income and avoid using credit,” she recommends.
Feel free to seek help from insolvency professionals or consumer support organizations if necessary.
- To reduce expenses and find a path to financial health, there is no secret. The good old-fashioned way is to budget your income and stick to it. Many organizations like ACEF, located throughout Quebec, offer free help and advice for building a budget and solving debt problems.
- When they can’t get 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 rate will generally be higher, and you also end up paying another monthly payment.
- Mortgage refinancing may be appropriate in cases where you are going through a temporary bad financial recovery, due to a job loss or separation, for example. If the problem is identified and a return to stability is imminent, refinancing may be an option. However, you have to do your calculations well to see if this is the most useful solution.
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