Debt is on the rise again for Canadian households and many are wondering if they should be tapping into the equity in their property to pay off their creditors. Attention danger !
Indeed, this solution, far from being a panacea, must be handled with care, warns Sylvie Desautels, authorized insolvency trustee at Raymond Chabot.
Yet it seems very attractive to many consumers, and for good reason: the interest rates are much lower than those of credit cards and personal loans, and by being spread over 15, 20 or 25 years, the monthly payments are also more affordable. But what sounds like a good idea could actually trap us in debt for a long time.
Rising interest rates
But first, what is a mortgage refinance? It consists of renegotiating your mortgage loan and using the net value (equity) of your property in order to increase the total amount of the loan. With the amount released, you can, for example, carry out renovations or consolidate your debts.
Sylvie Desautels explains that she often sees clients in her office who plan to proceed in this way in order to have access to an amount of money that will be used to repay all their creditors at once. But this solution is less advantageous than it seems, and above all is not suitable for all situations.
The Licensed Insolvency Trustee sees three major dangers in this. The first and not the least: even if the consumer pays his debts with a lower interest rate, the repayments are made over a very long period. In the end, this will generate a costly interest bill.
“Furthermore, if pre-pandemic mortgage interest rates were very low, they are currently on an upward trend. You can’t predict how high they will go, but it will necessarily increase the monthly amount to be repaid,” she says. In other words, even if we thought we would lighten the burden of our debts, we will on the contrary increase them.
Risk of relapse
Another pitfall that could arise on our way: the risk of recidivism. “By paying off all our debts, we create a false sense of security. Result: we start spending and using our credit cards again. We therefore make our situation worse and in the event of default, we could even lose our house, ”underlines Sophie Desautels.
Finally, we also expose ourselves to the danger of finding ourselves stuck indefinitely in the spiral of indebtedness, because we have not solved the problem at the source.
“To get rid of debt, you have to change your spending habits, reduce your spending so you can live on earned income, and avoid using credit,” she recommends.
Do not hesitate to seek help from insolvency professionals or consumer support organizations if necessary.
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