If you’re like most Canadians, you have some form of unsecured debt. Personal loans and credit card debt account for a large portion of debt within Canadian households. For every Canadian credit card that carries a balance, the average amount is $8,600 . At 20% interest a year, this means the average balance-carrying Canadian pays at least $100 a month in interest. Of course, this figure does not include personal loans, car loans, and other forms of debt. When adding these debts as well, the amount of interest paid each month is in the hundreds, if not thousands.
Getting out of debt is challenging. There are many theories and methods on how to get out of debt, such as the snowball method. However, none of these methods change this basic premise: credit card debt is expensive. You’re paying 20% or more in interest on these loans.
Instead of paying insane levels of interest, it makes more sense to have that money go towards the principal amount. Therefore, ideally, you would restructure your debt and make it a lower-interest loan with one low monthly payment. A single, simplified monthly payment lets you budget around that and enables you to pay your debt down faster.
A HELOC (home equity line of credit) is a perfect way to consolidate your unsecured personal loan or credit card debt into that one low-cost monthly payment. With rates as low as 3-4%, the interest cost of this loan type is much cheaper than the 20% or so that credit cards charge. On $20,000 of debt, the interest savings would be close to $300 a month. On $50,000 of debt, the savings would be over $700 a month.
Think about what you could do with that extra money. You could pay down your debt significantly faster. You could save for a vacation that you’ve always wanted. Or you could use that to make much-needed home repairs.
If a HELOC sounds interesting to you, read on to discover what a HELOC is and how you can start paying off your debt faster.
What Is A HELOC?
As the name suggests, a home equity line of credit is a loan that is backed by your home’s equity. The bank places a lien on your house for the value of the HELOC, like your first mortgage. Since your home’s value backs the loan, it is considered to be a secured debt and thus has a significantly lower interest rate. You can see more information here https://citadelmortgages.ca/home-equity-line-of-credit
You can take up to 65% of the value of your home as a HELOC. The total combined mortgage and HELOC value cannot exceed 80% of the value of your house. Consider how this works with an average $1 million Toronto-area home. If you have a $500,000 mortgage on this house, you can take up to $300,000 through a HELOC (so your combined mortgage and HELOC debt are $800,000 or 80% of your home’s value). If you have no mortgage on the house, you can take up to $650,000 as a HELOC or 65% of the value of your property.
A HELOC Sounds Great! How Do I Qualify?
Standard mortgage qualification rules apply to home equity lines of credit. If you are looking for a HELOC for $300,000 and you have a $300,000 mortgage, the bank would only extend you the HELOC if you would have qualified for $600,000 in total debt. Of course, that’s a little bit of a simplification, but the general idea is that you will have to go through a similar qualification process as applying for a regular mortgage. A qualified mortgage broker can assess your particular financial situation and help tell you for what amount you could realistically apply.
You will also need to have a home appraisal to determine the maximum amount your HELOC can be. This process usually involves sending someone out to your house to verify that it’s in good condition. They will then take some photos and use the information to compare it to other sales in the area. The appraisal processor will then give a valuation of your home, and that is the value of which you may take up to 80%.
For many homeowners in the Greater Toronto Area, the appraisal process will have a valuation significantly above the original purchase price of the house. If you bought your home 10 or 20 years ago, you might find that the appraisal comes back as double what you originally paid for the property. HELOCs are so powerful now because home prices have skyrocketed recently. You can have access to all the money you need to consolidate your unsecured debt!
I Want To Consolidate My Unsecured Debt. How Do I Apply?
If you would like to consolidate your unsecured credit card debt, applying for a HELOC makes perfect sense. It will give you a comparatively low, single monthly payment. It will improve your cash flow and give you a sense of relief. No more 20% interest cards!
The application process is similar to that of a mortgage. You will need evidence of employment, pay stubs, and the lender will need to do a hard pull of your credit report.
While it’s possible to apply at a bank, going through a mortgage broker makes more sense. Mortgage brokers can work with multiple lenders to get you the best rates and terms. At Citadel, we work with most major Canadian banks and credit unions. The best part of going through a mortgage broker is that you only have one hard pull of your credit report. The broker can then submit your application to multiple banks. If you were to try and do the same, each bank would pull your report individually, resulting in a significant drop on your credit score.
You don’t have to live a life full of debt. Depending on your financial circumstances, obtaining a HELOC can be the first step to seeing the light at the end of the tunnel. Consult with a mortgage broker to determine if this debt consolidation solution is right for you!
By using a mortgage agent or mortgage broker from Citadel Mortgages, you will be able to ask all the questions you have and be ensured you get the best advice and mortgage product for your mortgage needs. Contact us here at Citadel Mortgages to become mortgage-free sooner!
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