Owning a home is a big step toward securing yourself financially for the future. With each mortgage payment, you are building equity. But with the cost of living going up and housing costs increasing, homeowners are worried about paying down debt.
Every penny counts, but Canadians spend almost 15% of their disposable income on debt obligations. In fact, non-mortgage debt has also been rising by region over the last four years. Many households might be house rich but cash poor.
The new Affordability Metric by the CMHC indicates that households spending more than 30% of their income on housing are likely to experience housing affordability challenges. It considers a household’s net income after taxes and transfers, including expenditures related to housing. Given the 30% shelter cost-income ratio (STIR) – how can homeowners pay off non-housing expenses (ie. credit cards, car loans, secured personal loans, food and bills)?
Here are a few tips on how to pay down a mortgage while consolidating your debt with a secured personal loan.
The Benefits of Secured Personal Loans
Since mortgage holders tend to have a higher credit score than non-mortgage holders, they qualify for lower interest personal loans. According to the CMHC, over the last four years, the average credit scores for consumers without a mortgage have worsened slightly, indicating that these consumers are having a hard time paying off debt than those with a mortgage. The good thing is that homeowners have options of taking out a secured loan for emergencies or debt consolidation.
Taking out a secured personal loan or debt consolidation loan can help you get out of the cycle of consumer debt such as credit cards. Among the many advantages of owning a home is that it offers collateral for a secured loan, which makes it easier for lenders to give you lower rates. And, because it’s secured by your home, you can usually get your loan approved quickly – in as little as one or two days.
One of the factors that credit bureaus use to determine your credit score is the type of credit mix you have. Having three credit cards shows only one type of credit use, whereas having a mortgage and a secured loan shows a better mix of credit. A secured loan with payments are made on time will give your credit score a boost.
Strategies for Paying Your Mortgage Faster
Increase Your Mortgage Payments
Increasing your payment by $50 or $100 a month over the life of your mortgage can pay off your mortgage years earlier and save you possibly tens of thousands of dollars. While you consolidate your credit card debt through a secured loan, you can make additional weekly or bi-weekly payments towards your mortgage.
Make Lump-Sum Payments
When you make a lump-sum payment on top of your regular mortgage payments, you are reducing the outstanding balance of your mortgage. Payments can be made before the end of your mortgage term, at the end of your term, at certain times during your mortgage contract, and on certain dates set out in your mortgage contract.
For example:
For a $250,000-mortgage (5% interest rate and 25-year amortization) choosing an accelerated bi-weekly payment over a bi-weekly regular payment ($727 vs $670) allows you to pay down your mortgage more quickly. You could pay off the mortgage in just over 21 years and reduce your interest costs by almost $30,000.
Be sure to check your mortgage contract to see if you are allowed to pay more than the amount on your contract. You may incur a prepayment penalty if you put in more money than your prepayment privileges allow.
The Benefits of Refinancing Your Home
Refinancing your home simply means replacing your original mortgage with a new one. The most recent CMHC Mortgage Consumer Survey states that the top reasons for refinancing your mortgage include paying off debt, fund home improvements, fund financial investments and purchase of investment rental properties. Homeowners go online to use a mortgage calculator and compare interest rates. Below are a few reasons why homeowners choose to refinance.
Consolidate debt
Like a secured personal loan, refinancing your home can help consolidate debt. When you refinance your home, you are freeing up extra cash to pay off your high interest credit card debt.
Lower interest rate
If you refinance your mortgage, you may take advantage of a lower interest rate. When the mortgage rate drops since you last received your mortgage, you’ll end up paying lower monthly payments.
Change mortgage type
If you receive a tax return or a raise a work, you may want to put the extra funds into your mortgage. By refinancing into an open mortgage, you get more prepayment privileges. On the flipside, when the interest rates have dropped, you may want to take advantage of a fixed-rate mortgage to save on interest.
Paying down your mortgage means that you have more money to invest in your RRSP or go on a vacation.
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