Using equity in your home to deal with debt

Consolidating debt

Just over a year ago, I shared my thoughts about whether it might make more sense to stay in your current home and renovate as opposed to jumping into the frenetic housing market.

I also talked about the logistics of paying off consumer debt (ie: credit cards, lines of credit, car loans) by refinancing your home.

Towards the end of 2022, we certainly saw the housing market calm. Rates have increased exponentially and prices have softened. People are stepping back to think about whether buying a new or different home is in the cards for them.

Since the middle of December we have seen fixed rates start to come down. I am working with several families who have renewals coming up this year. They are definitely feeling the pinch financially. Even though they are in fixed rate mortgages, with the prices of everything else increasing they are finding it more challenging to make ends meet.

I am not a huge fan of refinancing to pay off consumer debt. Although the interest rate will be lower on a mortgage than on credit cards or unsecured credit lines, you are taking a much longer time to pay off the debt. You are also eating into the equity in your home.

Sometimes, however, a careful look at your monthly expenses may show that refinancing to consolidate your debts is the right move.

As an example, last year I worked with a couple who found they were in over their heads.Their mortgage balance was $285,000. Their previous rate was 2.79 per cent so their payment was $1318.23. They had a car loan of $38,000, with a payment of $700.00 and combined credit cards and lines of credit totaling $65,000. Monthly payments between all of them came to about $1350.00.

I looked at several options for them. If they went with a straight renewal of their mortgage, the payment at the current rate of 4.79 per cent would be $1623.67.

If they wanted to roll all of the debt from the credit cards and lines of credit into the mortgage, their rate would be 5.34% and their monthly payment would be $2314.27.

Initially they were hung up on the difference between the two rates and the higher payment. The payment was almost $700.00 per month higher. What we looked at was the total monthly cash flow. They were paying more than 10 per cent interest on their credit lines, and 29.9 per cent on their cards. Their monthly commitments between the car loan and the other debt was $2050 per month. That, plus $1623.67, came to $3673.67 monthly towards debt repayment.

Adding the $100,000 to their mortgage meant a monthly commitment of $2314.27. This meant they were paying out $1359.40 per month LESS for their debts.

Another consideration was that they weren’t making any headway on their consumer debts at all. By just covering the interest they were on the never-never plan and getting incredibly discouraged by their situation.

Current guidelines allow clients to refinance to 80 per cent of the value of their home. For instance, if your home appraises at $500,000, you could refinance to a total of $400,000.

If you bought your home several years ago, it is likely the value has increased enough to allow for a refinance.

Let’s say you bought your home 10 years ago for $400,000, depending on the amortization and payment schedule you chose, let’s say your mortgage balance is now $300,000. The current market value of your home is $600,000.00. That means, provided you qualify to carry the larger mortgage, you could refinance up to $480,000.

I don’t recommend maxing out your mortgage based on current property values. However, exploring whether using some of the equity in your home to repay your consumer debt, or better yet to renovate or expand your current home, might be something to think carefully about.

The hardest step in this process can be picking up the phone to get the ball rolling. Sometimes its hard to admit we are swamped or even drowning from the debt we have. We feel that others will judge us and I assure you that is not the case. You would likely be surprised to know how many people are in the exact same position.

If you are struggling, I encourage you to reach out to a mortgage professional to see what options you may have.

It might be a tough call to make, but the outcome may help you sleep better at night.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Why do mortgage pre-approval numbers keep changing?

Figuring out the numbers

Why do mortgage pre-approval numbers keep changing?

From a broker’s perspective, trying to nail down an upper price point for clients is a little like (aging myself here) the sliding puzzles that were around when I was young.

I had a conversation with a young couple recently who were frustrated with a broker they were working with. They said every time they spoke with the broker their numbers seemed to change.

I explained a bit about how we calculate our pre-qualifications / pre-approvals and told them their broker is being very thorough to make sure they don’t end up writing a price point they won’t qualify for. I showed them how their broker is doing an amazing job of making sure they are set up for success.

Sometimes it gets frustrating on both ends being as it feels like the goal posts move faster than clients can find a suitable home to write an offer on. Having a rate hold in place helps eliminate part of this uncertainty.

Each mortgage application is slightly different. Each lender is slightly different. Clients may have T4 income or self-employed income, as well as other sources, including things like Child Tax (credit) income, pensions, interest or dividend income, RRIF payments, and co-borrower income.

Likewise, down payments come from different sources:

• Savings

• Proceeds of sale from another property

• RRSP (First Time Home Buyer withdrawals)

• Gifts from family

• First Time Home Buyer’s Incentive Program

• Borrowed sources (flex down mortgages)

And, of course, the “stress test” comes into play.

If you don’t know about the stress test, the short version is that we have to qualify your mortgage application at either your contract rate plus two per cent or the Bank of Canada benchmark rate, whichever is higher. The contract rate means the actual rate you will be approved at.

This calculation was a lot easier when fixed rates were below 3.25 per cent as we could use the Benchmark rate of 5.25 per cent and be certain of our numbers.

Right now most lenders have 4.89 per cent (plus or minus a little) available for a five year fixed rate on an insured mortgage. So I would run your calculations at 6.89 per cent and have a rate hold in place for you to be certain of your price point.

Easy, right?

Now we move onto the lender end of things. As an example, some lenders will use the full amount of CTC income. Others will only use a percentage. Some lenders will accept down payment from the First Time Home Buyer’s Incentive program while others won’t.

Some lenders will finance properties with wood foundations, while others won’t.

You get the picture here – the calculations that work with one lender to maximize your price point may not work with the lender that will actually finance the home you’ve written your offer on.

My best advice if you are venturing into the world of home ownership is to take your time and do your homework.

One of my columns from November talks about the challenges you can face if you don’t have your ducks in a row).

In many markets we need to help you maximize your mortgage amount just to get you into the market, so it will likely be several conversations before you have an exact number nailed down. Be patient with the process and learn as much as you can before you write an offer. The time invested upfront will help to make the process a smoother one for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

New B.C. law allows home buyers to back out of sales

Buyers' second thoughts

What exactly is the Home Buyer Rescission Period (HBRP)?

For months now, we’ve been hearing about a proposed cooling off period for home purchases. This is it.

Qualifying what is to follow with the fact I am not a realtor and that is not my area of expertise, I want to share a few important pieces I’m learning and how they may affect you, as a buyer or a seller.

Please do your homework and confirm with your realtor what your rights are with respect to rescinding any offers you are considering collapsing.

On Jan. 3, legislation comes into effect in B.C. that will allow purchasers a brief window of time to back out of a purchase contract for residential real estate. This timeframe is up to three clear business days (business days do not include weekends or statutory holidays) after an offer is accepted.

Opting out doesn’t require a reason, but it does come at a price. Should you choose to exercise your right to rescind a contract, you must pay the seller 0.25% of the purchase price.

As an example, if you were to rescind a contract on a $750,000 home, you would be obligated to pay the seller $1,875.

If an offer is collapsed, the rescission fee is payable to the seller. If there is already a deposit held in trust with a lawyer or notary, the fee will be deducted and paid to the seller before the deposit is returned to the buyer.

Realtors must provide information to their clients about the HBRP by way of a specific form that needs to be included in their contracts.

There are several key points to note:

• The HBRP cannot be waived, even by mutual agreement.

• There are exemptions to this legislation, including, but not limited to:

• Sales by way of foreclosure

• Pre-build sales

• Sales on leasehold land

• Sales by auction or assignment

• The legislation also applies to private sales.

• There are specific steps that must be followed if you are choosing to rescind an offer.

More information can be found at the B.C. Financial Services Authority FAQ website's Home Buyer Rescission Period Frequently Asked Questions.

So what does this mean in practice?

It will be interesting to see how many times we see this provision in action. I feel a little like it is closing the barn door about a year too late, but hopefully this will discourage some of the panic buying we’ve seen over the last few years.

I do feel for realtors who will be working their way through this.

Most of the offers I see have the deposit being made by buyers once they have removed all their conditions and gone firm on their purchase. Will this mean that buyers will have to make deposits at the same time their offer is accepted? Will realtors have to chase down the funds payable to the seller if a buyer backs out?

Some of the offers have come across my desk in the last two years have concerned me, more so the knowledge some clients felt forced to write subject-free offers just to have their offers considered. I imagine this new legislation will change that market dynamic.

Again, I am not a realtor ,so if you are actively buying or selling please make sure you talk to your realtor to see how this legislation may affect you.

On to a new and exciting 2023. I hope you and yours stayed safe and warm. Happy New Year.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Year-end mortgage rate drops could prove helpful

Fixed rates dropping

Most years, we see fixed mortgage rates start to drop towards the end of the calendar year as lenders try to boost their business to end the year strong. This year has been no exception.

Over the last few weeks, I’ve seen fixed rates drop from close to six per cent about six weeks ago to 4.79 per cent and better as of this week. These rates vary depending on whether your mortgage is insured or not, but in relative terms we have seen close to a one per cent drop in many cases.

What does this mean in practical terms?

For one client I’m working with who is a single mom searching for a home to call her own, this increase in affordability has increased her purchase price by almost $20,000, which in her community puts her into a house rather than a condo.

For people who have upcoming renewals it may be time to connect and explore your options. If you are coming out of a fixed-rate mortgage in the 2% range, it is likely you will be looking at a three month interest penalty to switch out of your current mortgage, if you choose to do so before your actual renewal date.

I don’t advocate jumping ship really early in every case. Paying a prepayment penalty and a higher interest rate isn’t always a great plan, but each situation is unique.

The next year is looking to be a bit bumpy with interest rates, and from what I’m hearing, rates will start trending down again towards the end of next year.

However, if you have a renewal coming up in the next four months I encourage you to reach out to explore your options now. With no historical research to support this, what I have seen for many years is interest rates pop up again as the new year starts.

I sat in on a call recently with the president of one of my favourite lenders. He had some interesting thoughts on the variable versus fixed rate conversation.

His firm has been watching delinquency rates carefully, and I was quite surprised to learn the numbers of variable rate clients in arrears was actually far lower than the number of fixed rate clients in arrears.

I’m not sure whether that has to do with the proportionate split as to how many clients choose fixed over variable, or if there is something else that really affects these stats. I do know I am concerned for some of my variable rate clients as I know I am feeling the pinch with my own monthly mortgage payment increasing substantially.

I was also surprised to hear that most of the lender’s variable clients were choosing to stay the course rather than lock into fixed rate terms.

If you are exploring whether locking in at this point makes sense for you, I encourage you to do your homework. Reach out to your mortgage person to run the numbers and see if this makes sense for you. With fixed rates now less than variable it may make sense, particularly if you are losing sleep at night.

However, if you are planning to make any changes over the next few years and are variable it most likely makes sense to stay the course.

Grateful to all who have reached out after reading my column to share their thoughts and feedback.

Wishing you and yours a wonderful holiday season filled with love and laughter.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Tracy Head helps busy families get a head start on home ownership.

With today’s increasingly complicated mortgage rules, Tracy spends time getting to know her clients and helps them to better understand the mortgage process. She supports her clients before, during, and after their mortgage is in place.

Tracy works closely with her clients, offering advice and options. With access to more than 40 different lenders. She is able to assist with residential, commercial, and reverse mortgages in order to match the needs of her clients with the right mortgage package.

Tracy works hard to find the right fit for her clients and provide support for years down the road.

Call Tracy at 250-826-5857 or reach out by email [email protected]

Visit her website at www.headstartmortgages.com

Download her app: Headstart Mortgage Architects



The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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