The idea behind debt consolidation is simple: You take on a single, big loan to pay off all or most of your other, smaller liabilities.

Usually, there are three big reasons to do it. First, focusing on a single monthly debt payment is much easier than chasing due dates for a multitude of creditors. Second, you might be able to get a lower interest rate on your debt consolidation loan than you were paying on several of your smaller loans. Third, especially if you were able to get a lower rate, the monthly debt payment on your consolidated loan may be smaller than the sum of what you were paying before to your many creditors.

How to consolidate debt, though, is anything but straightforward. Some options involve low-interest rates but the repayment period is so long that you may end up paying more interest on your debt overall. But math isn’t the only consideration. Psychology matters, too. Sometimes, a smaller payment and a flexible repayment schedule just enable borrowers to run up their credit cards all over again.

So what’s the best way to untangle your debts? Global News asked Scott Hannah, head of the B.C.-based Credit Counselling Society and Sheila Walkington, co-founder and CFO of Money Coaches Canada, to order debt consolidation options from best to worst. Their ranking was identical:

1. Term loans

The nice thing about term or personal loans is that they have an end date that isn’t too far off and, if you chose a fixed interest rate, predictable and generally mandatory monthly payments.

“That is why we recommend them,” Hannah said.

Term loans may come with interest rates slightly higher than those available through a line of credit or a mortgage. And because you have to extinguish the loan within a set amount of time, your debt repayments are also quite a bit higher than what you’d usually get away with using a line of credit.

But the more structured nature of term loans generally helps people stay on track, Hannah said. And a term loan from a bank or other mainstream lender still comes with lower interest rates than the 20% charge you’d typically get on a credit card.

Another advantage of term loans is that there are usually no prepayment penalties, Walkington noted.

If you qualify for a loan with a payment you can manage and have a fairly stable financial situation, this is the way to go, Hannah said.

2. Unsecured lines of credit

These days, unsecured lines of credit come with relatively low-interest rates of 5-8%.

They are “a good way to consolidate debt without locking yourself into a high monthly payment,” Walkington said via email. At the same time, “the flexibility to pay more than the minimum makes it easy to adjust your payments to your cash flow.’

But those traits also make lines of credit a potential slippery slope that leads many borrowers into deeper debt, both Hannah and Walkington told Global News.

“Without discipline, a line of credit may be difficult to pay down and easy to run up again,” Walkington said.

Also, the interest rate on a line of credit is variable. This means that both your minimum payment amounts and overall interest costs may rise if interest rates increase, as they have since July 2017.

3. Secured lines of credit (HELOCs)

Home Equity Lines of Credit, or HELOCs, are secured by your house and come with even lower rates (think 4.5 percent). Another perk is that your ability to borrow is linked to your home equity, so that your credit limit goes up as you pay down the mortgage, potentially freeing up room to consolidate higher-rate debt.

Other than that, HELOCs have all the pros and cons of their unsecured cousins, including variable interest rates.

Still, when it comes to psychological debt traps, HELOCs can be even more treacherous, according to Walkington and Hannah.

That’s because making only minimum payments on your HELOC comes with “the double whammy of not only not paying off the line of credit, but negating any progress on paying down your mortgage if one keeps running up the HELOC,” Walkington said.

4. Mortgage refinancing

By folding your high-interest debt into a mortgage you may be able to lock in an interest rate as low as 3.39 percent, according to a financial product comparison site.

With a fixed-rate and a low monthly payment, this can be a “‘get out of jail free’ opportunity to consolidate debt,” Walkington said.

But the math may not be favourable as the low interest rate suggests, both Walkington and Hannah noted.

If you have, say, $80,000 in credit card debt and are spreading it out over 20 or 25 years, Hannah said, you have to ask yourself, “how much interest am I going to have to pay on that debt over that amount of time?”

The answer may be: More than if you had not consolidated your liabilities.

Mortgage refinancing also comes with fees and potential penalties for pre-paying the debt before the end of the term.

5. Second mortgage

A second mortgage is a loan backed by a home that is already mortgaged. You’ll be paying a higher interest rate on a second mortgage because your lender is second in line on your property’s title. If you default, it’s the lender on your first mortgage that will get first dibs on your property.

Second mortgages, though, can still be a way to turn multiple debt charges into a single, lower payment. They are “a last resort,” Walkington said.

But taking out a second mortgage means committing to additional fixed costs for the long term, Hannah said. And even if you choose a fixed interest rate, those costs are likely to rise at renewal if interest rates keep going up.

And if you run into a snag, a second mortgage may be difficult to refinance, Walkington said.

6. Getting a co-signer on a debt loan or line of credit

Adding a friend or relative to your debt-consolidation loan can help you access credit or a lower interest rate if you have a bruised credit record or little credit history. This, though, puts your family and friends at risk if you default on your payment, which can put a significant strain on relationships, both Hannah and Walkington noted.

And co-signers often don’t realize that adding themselves to your loan will limit their own ability to borrow, Hannah said. Lenders will count your debt as their debt when they apply for credit.

In most cases, Hannah said, “it’s best to keep friends and family out of it.”

If you want to discuss home equity loan options to consolidate your debts, reach out to Private Mortgage Source now at 647-479-9849.

SOURCE

Tracy, a 61-year-old pensioner, recently sold her townhouse to help fund her retirement. Knowing that she needed an investment that produced a stable and predictable income source, a friend of hers suggested she try private lending.

This friend knows a homeowner whose home is worth $3.2-million with a $1-million mortgage and who is looking to borrow $200,000. This homeowner is willing to pay 7% per year for a term of three years.

Tracy is considering the deal because 7% interest is four times what her bank is offering on their term deposits. She feels there would be some protection because a lien would be registered against the borrower’s home, thus eliminating the risk of the property being sold or re-financed.

Before agreeing to these terms, Tracy wrote to me for my opinion.

Cash flow and rates

To make this decision, Tracy requires a lot more information. She should take the same precautions that a bank would and collect personal and financial information on the borrowers.

My main concern would be their cash flow as they have an existing $1-million mortgage. I would want to verify their employment, salaries, credit scores and their plan with respect to paying back the loan.

I also need to know how the funds are going to be used. If the money is being borrowed to service existing debt, that’s a concern as it likely means there is a cash-flow issue.

Another concern is that the 7 per-cent interest rate seems low. Rates charged are risk-based, and private loans are often risky. Any borrower dealing with a private lender is usually doing so because they have exhausted all other options.

Their parents, banks, credit unions, and secondary or alternative lenders have likely turned them down or were willing to lend money, but at a much higher rate than 7%.

Often, borrowers are turned down for good reason, likely because they can’t afford or shouldn’t be borrowing more money. Due to the increased risk, most private-lending deals pay 10-20 per-cent interest.

I also think the term is too long. I wouldn’t be comfortable with a three-year deal.

I would only consider a one-year deal, which could be renewed but at the discretion of the lender.

Know the reasons

For me to consider lending, I would need to know the reason their bank turned them down. Maybe it was simply due to a small technicality, which had nothing to do with their creditworthiness or ability to service or pay back the loan.

I may consider lending the funds in this case, or if, for example, they are borrowing the funds to simply fix up their home before selling it. Or maybe they just need a year to sort out their financial affairs before being able to qualify for a loan with a traditional lender.

What a private lender wants to avoid is a situation where the borrower can no longer make payments or pay out the loan by the end of the term. If that were to happen, then the lender would have to force the sale of the property, which is expensive and time-consuming.

In the end, Tracy decided against private lending. She wasn’t comfortable lending $200,000 as it made up 40% of the proceeds of the sale of her townhouse. She didn’t want to risk having that much of her retirement tied up in one investment.

My recommendation was that she lend no more than 10% of the sale proceeds.

Tracy instead decided to invest in a mortgage fund where professional underwriters complete the due diligence on the borrowers, something Tracy wasn’t willing or able to do herself.

The rate of return is approximately the same and the fund doesn’t tie up her money for three years.

Want to become a private lender? Contact Private Mortgage Source and let’s discuss private lending options that minimize your risk will giving maximum month over month returns – contact info@privatemortgagesource.com.

SOURCE

In 2018, Twenty percent of refinancing for mortgage deals in the second quarter were funded by private lenders, a 67 percent jump from the first quarter of 2016, according to a recent report Toronto based brokerage Realosophy and property data provider Teranet.

Purchasing homes and paying off mortgages are getting harder in Canada’s biggest city due to a combination of rising interest rates, higher home prices and tougher standards to qualify for a mortgage. The new rules require borrowers to prove they can make payments at higher rates and apply to new mortgages as well as refinancings or transfers to a new bank

The changes are a boost to private lenders, which are willing to take on riskier financing arrangements than traditional lenders. In turn, they charge higher interest rates, the report said. The share of mortgages financed by private lenders has increased from a low of 12 per cent in 2016 to 20 per cent in the second quarter of 2018.

Most of these lenders are mortgage brokers who have set up mortgage investment corporations to raise money for lending, John Pasalis, president of Realosophy said in an email.

Total private mortgage volume jumped to $1.5 billion in the second quarter, from $920 million in the first quarter of 2016, the report said. Almost half of private lending activity during that period was on detached homes that were refinanced; the next highest segment was for condo refinancing.

Generation Xers, or people in their 30s and 40s, were the largest group of consumers turning to private lenders, accounting for 42 per cent of all transactions, according to the report. A portion of this increase may be driven by owners who prefer to do major renovations to existing homes rather than moving to a bigger house, the report said. Private lenders are often more willing than banks to provide construction financing.

Private Mortgage Source provides private mortgage options for Canadians looking private mortgages whether it is for a residential or commercial property, we can help. Call us at 1-855-808-6615 and speak to a specialist about private mortgage options.

SOURCE

Excessive debts are a headache and cause nothing but a lot of worry and anxiety.

Let’s face it, earning enough money to care for daily living expenses while paying down credit card balances can be challenging; but thank goodness there are options available to those burdened with debt!

Debt consolidation mortgage loans are easy to qualify for and provide enough funds to pay off creditors. The funds can be used to pay off credit card balances, personal loans, auto loans, and to even invest in an investment property of business. Once credit account balances are zero, homeowners simply submit one monthly payment to repay the debt consolidation loan.

Because debt consolidation mortgage loans have very low-interest rates, most homeowners are able to repay the loan within a short period of time with low, affordable monthly payments. Expect to save hundreds each month!

If opting to take advantage of a debt consolidation mortgage loan, you may select a mortgage refinancing or home equity loan option.

How to Consolidate Debts with a Mortgage Refinancing

Cash-out mortgage refinancing is perfect for consolidating unnecessary debts. Moreover, this method serves multiple purposes.

With a cash-out refinance, homeowners borrow from their home’s equity and use the money to consolidate debts. Refinancing creates a new home loan. Furthermore, if borrowing cash from your equity, the mortgage principle will also increase.

Home Equity Line of Credit and Home Equity Loans

Another approach for using your home’s equity to obtain cash for a debt consolidation involves getting a home equity loan or line of credit. In this case, loans are approved up to the amount of equity you have built in the home. Because home equity loans are protected, homeowners with less than perfect credit may also get approved.

Home equity loans are dispersed as a lump sum. This is ideal for paying large credit card balances and other types of loans. With a line of credit, homeowners are approved for a revolving credit account. Lines of credit are also ideal for debt consolidation

Privatemortgagesource.com is your number one source for debt consolidation solutions. Reach out and let’s discuss the best options that suit your needs.