In order to combine or consolidate existing debt from multiple loans into one loan, you have to have either a new loan for a large enough amount to pay out the existing debts, or you have to have an existing loan, like a line of credit with approved funds that are unused and which can be deployed towards paying down or paying out other debts.
With smaller debt consolidation amounts, say under $100,000, it is potentially possible to get new unsecured personal debt consolidation loans to provide the capital necessary for the consolidation to occur. But in order to qualify for this type of financing, the borrower’s credit would have to be very strong, he or she would have to be able to show a strong cash flow for debt servicing, and the borrower would also likely have to have a personal net worth several times higher than the total debt financing they are carrying.
Using mortgage refinancing is typically a much more effective debt consolidation strategy, provided that you have enough equity in your home to generate additional mortgage financing that can be used to retire or pay down other debts.
Mortgage loans are also going to be cheaper than any unsecured financing option on a similar situation as the risk to the lender is going to be a lot lower in the event of loan default.
And if the borrower’s credit and cash flow are strong, there is even the possibility that they may be able to improve upon the base rate that was in effect for the old mortgage that would need to get paid out. So not only can the cost of interest be lowered by eliminating higher cost sources of short term debt that you want to consolidate, but it can be further lowered by securing a lower mortgage rate, provided that is available in the market at the time of refinance, and the borrower’s current mortgage position will not incur prepayment penalties that would wipe out the benefit of the new mortgage rate.
Mortgage refinancing also provides you with the opportunity to realign your debt repayment schedule over a longer period of time. Its quite likely that the debt you want to consolidate is going to require a shorter term repayment period than a new mortgage, so with a lower overall rate and a longer period of repayment of loan principal, you have the ability to realign your monthly debt servicing requirements with your available cash flow.
There can be many different scenarios and financing options to consider when trying to consolidate debt through mortgage refinancing, which is why it can be very beneficial to work through an experienced mortgage broker who can assist you in working through the mortgage refinancing and debt consolidation options that are the most relevant and beneficial to your particular situation.
With our society heavily dependent on the use of credit cards and the economy not completely turned around, there is a certain amount of debt servicing challenges on both short term credit card debt and long term residential home mortgage financing obligations.
If want to try and refinance debt, there are a number of different things you can consider.
The first thing to consider is lower cost debt refinancing actions. If overall you have a reasonable amount of debt to manage, you’re up to date on your payments, and your credit is still in good shape, then you can basically look at moving your debt from one or more lenders into a new loan provided by another source that you can qualify for.
Depending on the amount of deb refinancing required, you may be able to achieve this through unsecured debt such as low interest rate credit cards that offer a low interest rate to allow you transfer existing balances over to them from higher cost facilities. You can also consider secured debt options where assets are pledged as security to the lender to support the amount of financing provided.
The keys here once again are that you have the cash flow, credit rating, and total debt level that can qualify for debt financing with another lender.
If, on the other hand, any of these three areas are in distress, then simply moving your debt load over to a lower cost lender is going to be less likely.
Banks and institutional lenders are not overly interested in taking on another lender’s bad credit loans and bad credit mortgages.
If you are in more of a distressed situation where you have incurred late payments already and/or you are now behind in your payment obligations, then your next best options are going to be in the form of a home equity loan from a private mortgage lender.
A private mortgage either in first mortgage or second mortgage financing position, can allow you to borrow against the equity of your home, up to 80% of its fair market value.
Utilizing a Toronto private mortgage lender is only going to be a sort term solution as most private mortgages are only provided for a period of one year. But debt refinance through a private lender can potentially allow you to consolidate your debts are a lower overall rate of interest and reduce your monthly payment requirements through interest only payments.
This type of debt consolidation loan will buy time to either get your credit and financial profiles in order so you can access cheaper money, or sell off your home in a timely fashion in order to get the most for it and use part of the proceeds to pay off your debt commitments.
In most situations where debt consolidation is being considered, credit and cash flow have been stressed to the point where not only are unsecured financing options not likely to be available, but institutional secured mortgages in the form of a residential home mortgage in first position, or a second mortgage may also not be available due to a fall in credit rating or a tight cash flow.
That being said, the starting point for any type of home equity loan is primary and secondary institutional lenders. Even with less than stellar credit, there may be a B lender that is still prepared to provide you with good a institutional mortgage rate through a debt consolidation loan registered as a mortgage.
If you can’t qualify for an “A” or “B” mortgage lender program, but still have equity available in your home greater than 15% of the market value, then you would next turn to a private mortgage lender for either a new first mortgage, or a new private second mortgage.
In most cases, regardless of the approach taken for debt consolidation, the credit cards and lines of credit that get paid off or paid down can still stay open to be used in the future. This provides added flexibility going forward to manage your cash flow in a fashion that will keep financing costs to a minimum.
If a private mortgage is the best available option, which it is in many cases where Toronto debt consolidation loans are required, the term will most likely be for only one year.
So in effect, this become a bridge loan that will need to be paid out or further refinanced in a years time. But the time provided can be extremely valuable in 1) lowering the overall interest costs you are playing; 2) improving your cash flow through interest only payments, and 3) giving you time to rebuild your credit so a lower cost option can be secured one year hence.
The first step when considering a Toronto debt consolidation loan is to work with an experienced mortgage broker who can direct you towards the most relevant options available to you in the market and then help you get your debt consolidation loan in place in the time you have to work with.
First of, a debt consolidation mortgage is one of the most common and popular methods for consolidating higher cost, high cash flow demand debt into a mortgage instrument that carries a lower interest rate and has lower monthly debt servicing requirements.
A debt consolidation loan effectively leverages the available equity in your home in order to generate incremental funds that can be used to retire or pay down other debts.
The two types of debt consolidation mortgages placed in the Greater Toronto Area are a refinanced first mortgage or an additional mortgage registered behind any pre-existing mortgages on the property.
Both types are new mortgages that will be used to pay out short term debts and potentially other mortgages if a mortgage refinancing is also being done.
With a mortgage refinance, a new mortgage is issued for an amount greater than the old mortgage. The old mortgage is then paid out and the balance is applied to other debts you want to pay off or pay down. There can be a number of reasons for taking this type of approach with the most common being the desire to maintain the lowest possible interest rate afforded by a first mortgage position. As long as the repayment penalties are low or not applicable and your credit and financial profile still allow you to qualify for a low cost mortgage, then this may be an approach you want to considre.
The second type of debt consolidation loan financing scenario is via a new second mortgage or a new mortgage placed behind the existing mortgages already in place. For people with poor credit, in many cases created by the very short term debt they are trying to consolidate, a new private mortgage registered in second position is a very common approach to debt consolidation.
On the other hand, if you can still qualify for “A” type credit, but the prepayment penalties are going to be significant to refinance your existing first mortgage, then a bank or institutional second mortgage would potentially be an options.
Depending on your specific situation and requirements, there can be several Toronto debt consolidation mortgage options to consider.
As Toronto mortgage brokers, we welcome the opportunity to discuss your situation with you either on the phone or in person and go over all the different options you have available to you.