Q: We’ve always used our line of credit to pay our bills and credit cards, and then we’d refinance our mortgage to pay off our line of credit. We’ve never had trouble making our mortgage payments, so we were a little surprised when the bank told us we don’t qualify for our usual refinancing. Now we’re not sure what to do because our credit line is maxed and it’s only a matter of time before we can’t afford the payments. Help!
A: Over the last number of years, interest rates have been low, both for lines of credit and mortgages. During this time, property values in a lot of regions increased, giving homeowners access to a lot of "artificial” equity.
The federal government became concerned about the increase in mortgage debt and has tightened up the borrowing rules for certain types of mortgages a number of times since 2008. Among other things, the most recent changes, in effect on July 9, reduce equity take-outs from 85% to 80%. This means that anyone with a government-backed insured mortgage (e.g. CMHC) cannot owe more than 80% of the value of their home when they refinance their mortgage. This change will affect countless people who have been relying on their home as a personal money tree.
To deal with your debt situation more effectively, we would suggest:
Create a Budget
Living beyond your means by relying on credit is not sustainable. Track your expenses to find out exactly what you’re spending and then start reducing where you can right away. You need to balance your budget, which means not spending more than you earn.
Prioritize your Debt Payments
Essential payments are typically at the top of the list, like your mortgage and car payment. Focus on developing a realistic payment plan and learning how to get get out of debt. If you don’t have enough money to make all of your payments, start looking for help to consider other debt consolidation options.
Debt Consolidation Options
There are a number of debt consolidation options our Credit Counsellors discuss with clients every day. These include loans, mortgage refinancing when possible, credit counselling repayment programs, settlements and consumer proposals. Some clients have assets they can sell, it may be worth cashing in some investments, or they may be able to use their home to generate a little extra income.
Above all, get help sooner than later. You’ll have more options and you won’t need to worry because you’ll have a realistic plan that helps you manage.