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Personal debt can weigh on a person. It can take an emotional toll and affect someone’s relationships, job or their ability to buy a home or a car. Underlying the negative impact of debt is the tanking of your credit rating.

You don’t need good credit to fix your debt problem. While every situation is equipped with its own set of challenges, debt consolidation is a solution that can help many people. It can straighten out finances, reduce monthly costs and can help someone regain control over their life.

Here are some tips for consolidating debt:

Find the root of the problem

Are you living beyond your means? Are you paying off the debt with the lowest interest rate? Do you need to downgrade your home? Most people might be surprised to learn where their debt stems from and that there might be some obvious ways that one could tackle the problem.

It takes an honest approach to understand what is fueling your debt.

Research your different options

With debt consolidation, there’s no one size fits all. You need to understand all your options. Transferring debt or securing a loan are just two of the options. In certain cases, you could even opt for a debt settlement.

Whatever option you chose, the best course of action is to create a debt management plan. This plan can be crafted by a credit counselor or debt expert or it can be an agreement between you and your creditors that outlines the repayment plan in exchange for lower interest rates.

Avoid the usual traps

Without knowledge or a plan, you could thwart your efforts for a debt-free life instead of enabling it.

Two of the more common traps are not prioritizing the debt with the highest interest rate or consolidating debt with low-interest rates with ones with higher interest rates. You don’t want to pay a credit card interest rate for your student loan.

None of this matters if you aren’t working with a true debt professional. Choose the right partner who can help you draft a realistic plan that will get you out of debt with as little disruption to your life as possible.

In 2018, Canadian homeowners had an average of 75% home equity available to them. Little surprise then that one-in-ten decided to take advantage with a home equity loan, up from 9% the year before. With the average Canadian home equity loan valued at $75,000, Canadian homeowners are increasingly taking advantage of the available cash tied up in their property. 

Renovating and Repairing Your Home

Using equity tied up in your home to improve the overall value of your home is a sensible way to invest in your own future. The most direct way to increase the value of your property is to renovate it periodically and keep on top of any required repairs.

A standard kitchen refit can add over 70% of the cost to the value of your home, as can upgrading the exterior panelling and features. Energy-efficient renovations, such as the installation of new insulation, provide a trifecta of potential cost benefits; lowering taxes, lowering monthly energy costs and increasing property value.

Investing in New Opportunities

By far the most common reason for taking a home equity loan in Canada is to create further investments or to take advantage of an investment opportunity. 

While the long-term goal of investing is always to get back more than you put in, you need to compare the timeframe of your loan with the expected timeframe of returns from your investment. Where possible, monthly/quarterly/annual returns on your investment are preferable to help with the repayments on your loan. If it’s going to be several years before you see a return from your investment take extra care to ensure that you can accommodate the additional repayments from your monthly budget before you take them on.

Consolidating and Repaying Debt

With the standard Canadian household debt now exceeding 170% of household income, home equity loans have increasingly become a route for consolidating debt under a single arrangement. Providing a better interest rate than the individual loans, debt consolidation gives homeowners more control over their debt. It also allows them to maximize the ratio of their repayments, increasing how much of each payment goes towards the principal debt, rather than interest on that debt.

Defaulting on a mortgage risks the loss of that property. Using the equity tied up within it to help get your finances in order, so that never happens, is a sensible option to protect your assets. 

Buying a Second Property

A second property can have many benefits, not least of which is the opportunity to open up a new line of monthly income. 

Buying a second property with the explicit intention of renting it out long-term can provide enough monthly income to cover repayments on the initial loan. It’s always worth considering in advance what additional hidden fees there might be with becoming a landlord. Whether you go down the traditional private renting route or a more modern option such as Air BnB, there can be additional costs such as insurance and tax status changes to be mindful of.

When Not To Take A Home Equity Loan

While the reasons given here are some of the most common, and the most beneficial to your personal finances, there are of course many reasons that people take out home equity loans that aren’t as beneficial. The two we see most often are luxury items that will depreciate in value and, conversely, everyday expenses such as groceries, gas, utilities and bills.

Taking a home equity loan out to pay for a luxury holiday, buy expensive clothes or the latest technology removes value from your home and places it in something that won’t grow that value. If your budget doesn’t stretch to paying for groceries and utilities, a home equity loan isn’t going to fix that (unless it’s used to free up monthly cash by restructuring debt.)

Getting a Home Equity Loan

Extracting value from the equity in your property and finding effective ways to maximize your use of that cash can sometimes be tricky.

At Canadalend our experts are independent. That means they’re focusing on what is best for you, not what’s best for the bank they work for. The advice they give you, and the products they suggest, are for your benefit, not so they can meet a monthly KPI.

With access to hundreds of different lenders, and a multitude of different products, such as home equity loans, our experts can help you find the product you need to achieve the aims you have for your future financial wellbeing.

To find out more, contact Canadalend.com today and start a conversation about how a home equity loan can improve your future.