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For those considering a home equity mortgage and are new to its potential benefits, the best course of action is to speak with an experienced, trusted professional. Knowing exactly what questions to ask is important so that you can get the answers you need and make an informed decision.

Is my Reason for Applying for a Home Equity Mortgage a good one?

The first thing you want to do is disclose why you are considering a home equity mortgage. An honest mortgage professional will tell you whether this type of loan is appropriate for your needs. For instance, if you are planning to borrow against your home to pay off a credit card debt or take a cruise, they should immediately dissuade you. If you are considering this type of loan to improve your property for future real estate, then they should reassure you that that is typically an acceptable reason.

What is the Repayment Structure?

With any loan, you want to make sure you understand every aspect of it and an important aspect is how you will be expected to repay. Every loan and lender is different and while it might seem obvious, no matter how badly you need the loan this isn’t a question you want to gloss over.

Are the Terms of the Loan Negotiable?

Even if you know the interest rate and terms of your home equity loan going in, you should always ask if there’s room to negotiate. Even if the answer is no, it’s better to ask and try to walk away with more value. The goal is to enter into the best arrangement for your financial future.

Don’t be Scared to ask for the Fine Print to be Explained to you

There’s a lot of fine print with a home equity loan so take the time to peruse and ask questions before signing. Some of it will feel minute and insignificant but it can be anything but.

There’s no such thing as a dumb question and no professional will expect you to understand what it all means. The onus is on you to ask the right questions.

What Is Power of Sale in Ontario?

Power of sale in Ontario occurs when a homeowner fails to meet their mortgage obligations. If a mortgage falls into arrears (people fall more than three months behind on their payments), the lender can consider the borrower to be in default. This is when the power of sale process in Ontario begins.

The number of Canadian mortgages in arrears increased significantly during the economic downturn. In early 2008, 10,100 mortgages, or 0.27% of them, were in arrears; by 2011, the number had jumped to 18,702 or 0.45%. While the number of mortgages in arrears has fallen, 13,180 or 0.28%, of all Canadian mortgages were still in arrears at the end of 2016.1 That may not sound like a lot, but it affects a lot of families.

There are a lot of reasons why Canadians get into debt. Some debt is easier to pay off than others. When the debt load gets to be too big, households have trouble juggling bills and deciding which ones get paid off first. More often than not, the mortgage is the first bill that does get paid; however, even mortgage payments can get missed when money is tight. But lenders are only so forgiving.

Power of sale is very common in Ontario. When the homeowner defaults on the mortgage, it gives the lender the power to sell the property and collect the outstanding balance of the mortgage. When the power of sale occurs, the homeowner still retains the title to the property and keeps any surplus after the debts and costs are paid.

With the cost of housing soaring in the Greater Toronto Area, many first-time homebuyers are attracted to the idea of a power of sale property as they hope to get a deal on it. But in a power of sale situation, lenders are obligated to get fair market value for the property.

Types of Power of Sale

In the unfortunate event of a power of sale, the lender has the legal right to recover their interest in the property. But the homeowner is not left on the sidelines. There are power-of-sale rules that both the lender and borrower have to follow as outlined in the Ontario Mortgage Act.

Under the Ontario Mortgage Act there are two types of power of sale: contractual and statutory.2

Contractual

A contractual power of sale occurs when the mortgage documents include the power-of-sale provision. A contractual power-of-sale timeline starts when the lender gives the borrower notice of a power of sale after 15 days of default.

The notice is called a Notice of Sale and is attached to the Mortgage Act. It informs the borrower of the lenders intention to exercise their power-of-sale right and includes detailed information on the mortgage: the date the mortgage was made, the amount owing, and a warning that if the amount owing is not paid by a specific date, the lender will sell the property.

Under the contractual power-of-sale timeline, the borrower has 35 days to pay unless it is stated otherwise in the mortgage. If after 35 days the borrower has not corrected the default, the lender can sell the property. Usually it is listed with a real estate agent, but it can also be listed independently or put up for auction.

Statutory

A statutory power of sale occurs when the power-of-sale provisions are not included in the mortgage. While it is uncommon for the power-of-sale provisions to not be included in the mortgage, the lender can still initiate a power of sale as long as the borrower has been in default for three months or longer.

If the power of sale is statutory, the borrower has 45 days to pay. During this period, the lender cannot take any further action. Meanwhile, the borrower can repay the amount owning on the mortgage and bring it back up to date.

If, after 45 days, the property owner fails to catch up on their mortgage payments, the lender can step in and sell the property.

The Power-of-Sale Process in Ontario

The power-of-sale process in Ontario was created to keep “foreclosure” out of the court system and allow the lender the get the defaulted loan back in order. Still, a power of sale can occur quickly, in as little as 53 days. Again, if the power of sale goes through, any extra money is given to the homeowner unless there is a shortfall, in which case, the owner is responsible to make up the difference.

But the power-of-sale process is a lot less painful than a foreclosure. A foreclosure is a legal process where the lender gets a court order to take possession of the property. The rules for a foreclosure are also a lot stricter than with a power of sale. In a foreclosure, ownership goes to the lender. The lender does not need to negotiate with the prospective buyer and, as a result, the selling price is not as important as it would be with a power of sale in Ontario. At the same time, any profits that come from the sale of the house go to the lender. As does any loss.

Major Differences

Power of Sale

• Borrower remains title holder
• Property usually sold using a realtor
• Borrower responsible for any losses
• Extra money from sale goes to borrower

Foreclosure

• Property gets transferred to lender
• Property usually sold at auction
• Borrower is not responsible for any losses
• Extra money goes to the lender

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Canadalend.com, Helping Canadians with their Mortgages

If you’re in arrears with your mortgage and are looking for a way to get caught up with back payments, contact a mortgage broker at Canadalend.com. The independent mortgage experts at Canadalend.com will help evaluate your financial situation and consider all of your options.

To find out what your options are, contact Canadalend.com today. Or you can apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Sources:

1. “Number of Residential Mortgages in Arrears,” Canadian Bankers Association, last accessed March 16, 2017; http://www.cba.ca/Assets/CBA/Files/Article%20Category/PDF/stat_mortgage_db050_en.pdf.
2. “Mortgage Act,” Government of Ontario, last accessed March 16, 2017; https://www.ontario.ca/laws/statute/90m40/v6#BK34.

When compared to other loans or lines of credit, a home equity loan is typically regarded as a smart financial maneuver.  The logic is straightforward: using an existing asset for financial gain or help is smarter than simply borrowing money from a lender such as a bank.

Let’s look at some specific reasons as to why leveraging your home equity is a smart play if you understand how these loans work.

It’s a Return on your Investment

This isn’t to suggest that a home equity loan is providing a dividend, because it’s not. What this means is that every month as you pay off the debt of your mortgage, you are building up equity. This equity is incredibly handy when you need a cash influx. Your home is your investment; it should be working for you.

Use it on the Appropriate Necessities and you won’t Regret the Decision

There are acceptable reasons to dip into your home equity, and if you don’t stray from these legitimate reasons then you most likely won’t experience regret.

The usual suspects are a medical emergency, home repairs, post-secondary education or maybe even to start or expand your business. A home equity loan is usually considered a good source to fund the above-mentioned expenses because they fall into the needs category and not the wants category.

Home Equity vs. Line of Credit

Lines of credit can be a viable and useful part of a financial strategy. The best part is that you only repay what you use. In most cases, the average line of credit provided by banks carries a bit more risk for borrowers that a home equity loan due to higher interest rates and less flexibility.

Avoid the Less than Smart Plays when it comes to Home Equity Loans

Anything to do with buying frivolous items with your home equity is a bad idea. Boats, cottages, cosmetic items or travel are not recommended uses. Using it for non-essential items can come back to haunt you.

Using the equity you’ve built up in your home in responsible ways can be an intelligent move and one that comes with reduced risk and won’t result in high levels of stress.

Refinancing a Mortgage to Consolidate Your Debt

Is it a good idea to refinance a mortgage to pay off credit card debt? If you own a home and have more than 20% equity in the property and are saddled with credit card debt, student loan debt, or other consumer debt, it might be time to refinance and consolidate your debt.

Why? Mortgage rates continue to be near record lows while interest on consumer credit cards can be in excess of 25%. Moreover, credit card debt is a problem for a lot of Canadians. Canadians now owe $1.67 for every dollar the earn. At the end of 2016, the average credit card balance was up 2.3% year over year at $4,094.1

While everyone knows they have to eventually pay that debt off, many are not aware that they cost of carrying that debt is going to rise. Interest rates are expected to gradually rise with debt serving costs projected to rise to 16 cents for every $1.00 of income by the end of 2017—it is currently at 14 cents. This may not sound like a lot, but it would represent a new record high. Unfortunately, this increase comes at a time when wage growth is almost non-existent.

A lot of Canadians burdened with high-interest credit card debt think the best way to settle the issue is through bankruptcy. But bankruptcy should only be considered as a last resort. Other debt relief ideas that you should avoid are payday loans, transferring the debt to another credit card, or cashing in your Registered Retirement Savings Plan (RRSP).

With interest rates on mortgages near record lows, it’s a much better idea to consolidate debt by obtaining a refinance mortgage. By taping the equity you’ve built up in your home, you will end up with a single monthly payment with a significantly lower interest rate. This will allow you to pay off your credit card debt much more quickly, free up hundreds of dollars in cash flow each month, and save thousands in unnecessary interest payments.

Advantages of Refinancing a Mortgage to Pay off Debt

There are a number of advantages to refinancing a mortgage to pay off your high-interest credit card and even car loan debt.

Lower Fixed-Interest Rates

The interest rates on a refinanced mortgage will be lower than the interest you pay monthly on a credit card. While refinancing a mortgage to pay down debt means you will owe more on your mortgage, because of thelower interest rates, you will also free up cash—which you can put down on the mortgage to help pay off your mortgage more quickly and build up additional equity.

Single Monthly Payment

Not only does refinancing a mortgage to consolidate credit card debt simplify your finances by moving to one easy, monthly payment, it also leaves you with just one loan at a lower interest rate.

Improved Credit Score

Even if your credit is bruised, paying off your high-interest debts when you refinance a mortgage can actuallyimprove your credit rating. That’s because Canada’s credit bureaus see payment in full as a sign that you are good at handling credit card debt.

An Example of Refinancing to Consolidate Debt

Refinancing a mortgage to pay down credit card debt will mean that your mortgage is a little larger, but it’s better to pay a lower interest fee over the long-run than a high-interest fee for an indeterminate amount of time.

Before
Monthly payment on $245,000 mortgage: $1,650
Monthly payment on $15,000 credit card debt: $500.00
Total monthly payment: $2,150

After
Monthly payment on $270,000 mortgage (debts + early payout penalty): $1,740
Total monthly payment: $1,740

That’s $410.00 more in your pocket each month. How you use that extra money is up to you. You can make an extra payment on your mortgage, which could reduce your amortization period by a number of years. Or you could put that money into an RRSP or RESP which also means additional tax benefits. Or you could stow it away into an emergency fund.

Tips to Refinance a Debt Consolidation Mortgage

If you want to refinance your mortgage to consolidate credit card debt, make sure you do it right. That means doing research on your personal finances, reviewing your spending habits, and talking through the options with an independent, licensed, mortgage expert. Below are some top tips to consider when consolidating debt with a mortgage refinancer:

• Review your mortgage and determine the advantages and disadvantages
• Calculate fees associated with the loans you are considering
• Compare interest rates; will they be fixed or variable?
• Should you consolidate all of your debts or loans into the mortgage refinance?
• How long will you be in the home you are taking a refinancing loan on?
• Do the long-term savings outweigh the initial outlay?

Canadalend.com, Helping Canadians Refinance and Save

If you’re finances are stretched because of credit card and other consumer debt, a debt consolidation refinance loan might be the best road to take. That being said, a debt consolidation refinance loan is a big commitment and something that you need to consider carefully. If you’re looking to roll your credit card debt into a new mortgage, contact a licensed mortgage professional at Canadalend.com.

The independent agents at Canadalend.com will help evaluate your financial situation and consider all of your options. To find out if refinancing or breaking your mortgage to pay off credit card debt is right for you, contact Canadalend.com today.

Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.

Source:

1.“Pigged out on debt? Remember you have to pay for it, RBC warns,” The Globe and Mail, March 3, 2017; http://www.theglobeandmail.com/report-on-business/top-business-stories/pigged-out-on-debt-remember-you-have-to-pay-for-it-rbc-warns/article34198451/.