Debt Consolidation

You’re looking at your T4 slip from last year… or maybe your most recent pay stub and thinking to yourself, where does it all go? Sure, many people wish that those numbers after the dollar sign were a little higher, but it’s the vanishing act that alarms you most. Tax time is especially sobering; you can see how much money you made… but your credit card is still maxed out and you don’t have much to show for a year’s income.

If you’re looking for the holes in your wallet, start by making a list of your debts. Are your credit cards teetering at the top of their limits? Do you make regular use of your overdraft protection at the bank? What about any department store cards? And – quick – what was the interest rate on those balances last month? Have you added it up? Many Canadians are startled to see how much they are actually paying to service their debt.

Industry Canada, which monitors consumer data, reports interest rates for department store credit cards as high as 28%. Even competitive-rate credit cards will often run at 18% or more. And this is at a time when some mortgage rates are still tipping below 5%.

Why do the banks and department stores charge such high rates? These are unsecured debts, meaning that – if you default on the debt – the lender has no easy recourse to recover the money. Not surprisingly, they charge a higher rate – sometimes a MUCH higher rate – to compensate for the higher risk that an unsecured debt represents. A house is considered a reliable security, so mortgages often offer the best rates available anywhere.

Consider this, if you have equity in your home, consider increasing your existing mortgage. You can take advantage of attractive mortgage rates to save a bundle on interest charges. Compare current mortgage rates with the rates charged on your other debts. Get some professional advice on whether it might pay to do some refinancing and roll your other debt, such as credit card debt, loans and Lines of credit into your mortgage. By consolidating your debt into your mortgage payments, you should be saving money on interest, while improving your cash flow. 

Another Option is a getting a revolving line of credit (LOC) which could provide you with funds up to 80% of the value of your home with the advantages of a traditional mortgage with either a fixed or variable rate loan together with the flexibility of accessing the revolving LOC. You can look forward to a substantial reduction in the interest rate, and all you need to pay each month is the interest. You can do the math on this comparison yourself, or talk to a mortgage professional. If you are carrying credit card debt, you’ll be shocked at what you can save with a secured line of credit.

If your mortgage is coming up for renewal, this is the perfect time to reorganize and consolidate your debts at today’s excellent rates. Even if you are in the last year or two of your mortgage, it may make sense to re-negotiate your mortgage now, pay the minimal penalty and roll in your other debt at a low rate. Or, you may be able to benefit from this kind of debt consolidation through a second mortgage.