Debt Consolidation: Consumer Proposal or Second Mortgage

If you are struggling with high interest credit card debt or balancing multiple loan payments every month you may be looking for a way to consolidate your debt into your home mortgage. But is this the best option?

A consumer proposal in Canada is also a way to combine several unsecured debts into one lower monthly payment and may allow you to get out of debt sooner.

Home Equity or Debt Consolidation Loan

Homeowners can consolidate credit card debt, lines of credit and other personal loans into their mortgage, either by refinancing or by taking out a second mortgage. A debt consolidation loan secured by the equity in your home will usually carry a lower interest rate than the debts you are combining into your mortgage.

While a lower interest rate can mean a lower monthly payment, whether you save money will depend on the term of your loan.  It is very important to understand that interest is still being charged on your new loan. The longer your mortgage or loan amortization, the more interest you will pay.

It is important to note that a debt consolidation loan does not reduce your total debt.  If you consolidated $30,000 in credit card debt, you end up with a $30,000 home equity loan or second mortgage.  Your total debt has not decreased.

When A Second Mortgage Is Not A Good Option

A concern with a secured debt consolidation loan is the risk that you may lose your home. If your debts are more than you can reasonably repay even when rolled into your mortgage, debt consolidation may not be the best choice. If you become unable to make your mortgage payments your lender will likely take action to recover their loan by foreclosing on your house.

A second mortgage is not be a good solution if it does not deal with all of your debt problems. If you have debts that cannot be combined into your mortgage, or you continue to use your credit cards and accumulate new debts, you could find yourself owing more than you started with.

A Consumer Proposal Is Not A Loan

Filing a consumer proposal does allow you to keep your home by making a proposal to pay the equity in your home to your creditors over a period of time. It is not a new loan, and as such interest stops.

A consumer proposal is a good option if the total amount of all of your unsecured debts exceeds the equity value in your home.  How much you will have to pay will depend upon the equity in your home as well as your income, however it is certainly a viable option for consolidating high interest or multiple unsecured debts.

Can I Pay Off My Consumer Proposal Early With A Mortgage?

Yes, but only under certain circumstances.  Until your consumer proposal is paid in full, it is difficult to convince a lender to lend you more money, because they are worried that if you default on your proposal, all of your old debts return.  However, you may be able to qualify for a second mortgage, or an increase to your existing mortgage, while in a consumer proposal if:

  • you have sufficient equity in your home, such that with the new mortgage the total value of all mortgages is 80% or less than the appraised value of your home;
  • you have sufficient income to allow you to make the increased mortgage payments; and
  • you have an excellent mortgage payment history (no missed payments).

Even with these points in your favour the lender may require a co-signor, and you will probably pay a higher-than-market interest rate, so you should ask your consumer proposal administrator to refer you to a mortgage professional experienced with lending in consumer proposal situations to fully explore your options.

Before you take out a second mortgage on your home to pay off credit card or other unsecured debts, talk to a Consumer Proposal Administrator about your options. Find out if a consumer proposal will save you more money in the long run.