Do you feel a sense of dread when a bill arrives in your mailbox? Do you take an out of sight, out of mind approach to managing your bank account? You're not alone! Almost two thirds of households in British Columbia say their worry "is constant" according to a study commissioned by debt advisors Sands & Associates earlier this year.
That number is only increasing following the Bank of Canada's back-to-back interest rate hikes at the end of the summer. A more recent survey for insolvency firm MNP Ltd. found that 1 in 3 Canadians are already feeling the effect of higher interest rates, while 4 in 10 are afraid they'll be in financial trouble if rates continue to rise.
Debt has been on the rise in recent years, with overextension of credit and mismanagement of finances among the top causes. However, there are solutions available if you're willing to seek help.
Yes, Your Home Equity Can Help You Pay Off Your Debt
Many people try to cut expenses – including reducing housing costs – to cope with their debts, but that's often easier said than done. However, if you've owned your home long enough to build up some equity, you can unlock that potential to restructure your debt.
Despite rising rates, a mortgage still has a better interest rate than most other debt instruments – by which we mean an unsecured line of credit or a credit card. Your mortgage can also allow you to roll your short term debt into your long term debt, saving both time and money.
Consider this*:
| Total Debt | Monthly Payment |
| Home mortgage $500,000 @ 3.14% (5 year term with 30 year amortization |
$2,140 |
| Unsecured credit line $25,000 @ 6.00% | $125 (just interest) |
| Credit cards $25,000 @ 18.00% | $375 (just interest) |
| Auto payment $20,000 @ 4.90% | $376 |
| 2nd auto loan $15,000 @ 5.90% | $288 |
| Total: $585,000 | $3,304 per month |
A 20 year fixed interest rate loan for $585,000 at 2.95% would have a monthly payment of $3224. So essentially your payments are $80.00 less, and your mortgage has dropped by 10 years, and all of your debts are now paid in full! That's $50,000 in credit card and credit line debt that you were never going to be able to pay off, because all you could afford to pay was interest - now it's gone.
Alternatively, a 25 year amortization at the same 2.95% rate would have a monthly payment of $2753.50; that's $550.50 per month of improved cash flow, and your mortgage is still paid off 5 years sooner.
Hopefully you can sleep a bit more easily knowing your home has got you covered. If you're interested in learning how you can restructure your debt and start rebuilding your credit, contact us today for a free consultation with one of our brokers: call Toll-Free 1-855-590-6520 or visit us at 307 Goldstream Avenue during regular business hours. We can also arrange an appointment evenings or weekends to work with you.
Auxilium Mortgage Corporation is based in Victoria, BC and works with clients locally and across Canada. The Auxilium team has over 100 years of combined financial experience and access to dozens of lenders to help you meet your goals.
* Note that calculations are based on interest rates available at the time of publishing. Interest rates are subject to change without notice.
