Greetings everyone,

I have been a reader on this website for a few months, but this is my first time visiting these forums.

I should note that we live in Canada.

(all numbers below are approximated)

My wife and I have lived in our house for two and a half years. We owe $150 000 on our mortgage. Houses in our neighbourhood (comparable to ours) go for roughly $215 - $230 thousand.

We are looking at refinancing our home to pay off a whole lot debt (in the area of $30 thousand). We have come to this decision because nothing else seems to be working. The interest rates and the amount just seem too high for us to climb out of without some sort of financial redo.



Anyone have advice on this? Is it a smart idea? Can it even be done? Any and all advice is greatly appreciated..

Welcome!
It would be a good idea to list your debts (interest rates) and your income/expenditures (see personal finance or fitness journals in the forums). If you have 20 credit cards, you can pay them off as you go, and you wouldn't necessarily have to refinance. Refinancing is not going to solve your debt problems because you might end up racking up the debt again and refinance again. It's a vicious cycle.

We'll help, but you have to provide more information.

Greetings;
Thank you for the reply!
We have two credit cards; one with $18000 on it at 18%, and the second with $10000
at 10%.
My wife had eye surgery last year, and there is roughly $3000 on that at 10%.

Our mortgage right now is locked in at 5.5%. If we were to refinance it now, we would be looking at somewhere in between 3 and 4%.
The last part of this equation is that I might be going back to school later on this year, if something bad happens with my job now.

Though I will never say never, I can't see us getting back into a hole such as this again. I wont go into details, but there were quite a few unfortunate and unlikely to happen again instances that brought us to this. I'm sure most people say that, but I really feel it to be true.

(We did not put one dime on credit for christmas, and have never done so, just to give an example of how we USUALLY are)

Hey there, welcome to GRS!

The first thing I want to highlight is what peachy already mentioned: You can't get out of debt by borrowing more money. Consolidating debt at a lower rate can save you money and get you debt-free faster, but only if you correct the underlying behaviours that got you into debt in the first place. Running up a bunch of debt after you've cleared off the cards will only leave you worse off than when you started. You have to be committed to paying them off, and leaving them paid off.

That said, I think I can help you with some of the mechanics of this. I'm Canadian, and I've been through a few mortgage refinances.

The first thing to consider is the penalty for breaking your current mortgage. It'll likely be 3 month's interest, or an interest rate differential, whichever is higher. 3 month's interest would be around $2,000 ($150k @ 5.5% * 3 months).

The interest rate differential, on the other hand, would be killer. I'm assuming your current mortgage is a 5-year term. You said you're halfway through it, so you're looking at 30 months difference. If you could refinance at 4%, you're looking at a differential of 1.5% (5.5% - 4.0%), which works out to $5,625. Now, they may calculate that based on the decreasing balance, so it could actually be a bit less than that, but without knowing your amortization and terms of your current mortgage, that's a worst-case scenario guess.

Next, you'd have to factor in CMHC. Currently, your loan-to-value is 70% (assuming the lower valuation of $215k and a balance of $150k). To avoid paying CMHC, you'd have to keep your loan-to-value below 80%. If you roll the $5,600 IRD penalty into the re-fi, that means you could still borrow $16,000 in equity ($172,000 max mortgage to stay below 80% LTV, minus $150,000 current mortgage balance, minus $5,600 penalty for breaking current mortgage).

Is $16,000 enough to pay off your credit cards? According to your follow up post, you have $31,000 in debt, so the re-fi would only pay off half your debt.

To be honest, I'm not even sure you could qualify for a new mortgage right now. Banks don't want to see more than 40% of your income going to debt repayment, and unless you've got a great income, it looks like you're probably already pretty close to the limit.

To take out enough to pay off your loans and cover the penalty, you'd have to re-fi up to $186,600 ($150,000 current mortgage + $5,600 penalty + $31,000 debt). That puts your LTV at 87%, which would mean you'd have to pay a CMHC premium of 2%, or $3,700 (which I'm guessing would also go right back onto the mortgage).

So even though your interest rates are brutal ($18k @ 18%? Ouch!), I'd not do the re-fi. You'd be taking a $5,600 penalty for breaking your current mortgage, you might not even qualify, and it wouldn't even be enough to pay off your debt (unless you were willing to pay for CMHC insurance, which would add another $3,700 to the mortgage). Basically, you'd be paying $9,300 in penalties and premiums to avoid some credit card interest. I suppose if you took forever to pay off the credit cards, it could work out to be worth it, but I'm pretty sure you can pay them off fast enough so that the total interest you pay is less than $9,300.

I'd cut your lifestyle, work on your network (in case your shaky job situation unravels), skip going back to school, put retirement savings on hold, and throw every spare penny at those credit cards.

Hope this helps, let us know what you decide to do and how it works out. Hope to see you around here more, this is a very friendly group! Except for that "DoingHomework" guy, watch out for him.

Hello and thanks for the reply!

Your post got me thinking, so I gave a call to the mortgage company that we are currently dealing with.

If we were to stick with them, we wouldn't have to pay any type of penalty for getting out of the mortgage. I asked about an amount that could be added, and they gave me a number somewhere around $40 thousand.

"To be honest, I'm not even sure you could qualify for a new mortgage right now. Banks don't want to see more than 40% of your income going to debt repayment, and unless you've got a great income, it looks like you're probably already pretty close to the limit."
This could be the dumbest question ever, but wouldn't they take into account that all of that debt would be gone were this to go through? There would be at least an extra $650 monthly available to us.

This stuff is enough to give me a headache!

Knowing you have 18k at 18% should be giving you a headache, not the solutions. You should be relieved that you're on the path to fixing the problem.

Is there any way you can get a card with a lower interest rate and consolidate those debts?

The other thing that worries me, and I'm not sure how your system works in Canada, but it seems to me that with that high of a credit card rate, maybe your credit isn't all that stellar. Are you sure your refi would be given at that low rate? Usually people with bad credit have higher rates all around. They don't get great house rates with bad credit ratings. That's my thinking...maybe the mortgage guy is luring you into a false sense of security.

The debt doesn't go away. It's rolled into your mortgage.

As far as I know, my credit rating is good. The only thing that would be dragging it down would be these accounts! It's probably that high in interest because we got the card when we were young and first moved in together. We were young, I worked, and she was in school. It didn't matter what the rate was, because we didn't ever carry a balance. Then the hard times hit. (if anyone really wants to know what those are, I would respond to private messages)


My wife and I do make a fairly decent living.
Last month, we were able to put an extra thousand down on the one huge credit card bill (extra of the minimum payment), and I also canceled the balance protector insurance, which equalled something like $160 monthly.

We aren't going to rush into any decisions right away. We are trying to weigh out all of our options and decide on which one will work best for us. I should probably call the credit card company and see about a lower interest rate, but I really dont see an incentive for them to give it to us. They are making almost 20% off us now, why would they want to drop that down?

Nope, that's just how it works in Canada, peachy.

My wife and I both have credit ratings in the 800's, and both our credit cards are 19.99% interest. That's a standard rate in Canada. To get a lower rate, you have to switch to a card that has an annual fee, and I'm not willing to do that. I don't really care about the rate, because I pay it off every month.

But I agree - we get ripped off in Canada. You should see the MER's on our mutual funds!

You're Ottawa. I am about six hours down the 401 from you!!


edit: As for the credit card rates: Do you think there would be a point in calling about lower interest on the card, or is that just a loss cause?

Right, they're probably talking about what's called a "blend and extend." In that case, they'd give you a new mortgage, reset the 5-year term, and give you an interest rate that's a "blend" of your current rate (5.5%) and the current market rate (4%). So you might end up with a 4.75% mortgage. I strongly doubt they'd give you the current market rate of 4% with no penalty whatsoever. Think about it from the bank's point of view - what would they have to gain from giving you that? It's just a losing proposition for them. They've already got you locked in for another 2.5 years at 5.5%, why would the suddenly give you 4%, free of charge, just because you asked? Out of the kindness of their hearts?



Right, that would take you up to $190,000, which would put your loan-to-value ratio at almost 90%. That's probably as high as they're willing to let you go. Under a "blend and extend," you might be able to dodge CMHC too (since it would just be modifying the rate on your current mortgage, rather than creating a new mortgage that would require new insurance).



They'd look at your monthly payments, and your monthly income.

You qualified for the initial mortgage, because you probably racked up a lot of this debt after you got your mortgage, am I right? So back then, your monthly debt payments were manageable. Now, however, you've got your mortgage payment, plus several hundred in "other" debt payments. If the total of all those payments is greater than 40% of your monthly take-home, they won't sign off on the loan.

But again, if you're doing a "blend and extend," it wouldn't be considered a new mortgage - it would just be modifying your current mortgage. So you might not be required to jump through as many hoops as if you were doing a blank-slate re-fi.

For sure, taking out some equity can reduce what you'll ultimately pay in interest. But just make sure they clearly explain to you exactly what's being offered. The "gotchas" to watch out for are the "blend and extend" and the penalty and CMHC premium. If you go with a blend and extend, you dodge the penalty and CMHC premium, but you only get a mediocre rate, not the best rate. To get the best rate, you'll likely have to incur a penalty, and possibly pay CMHC again (depending on how much you take out).

If they're actually offering you current market rate (4%-ish), without any penalties, then get it in writing, because that's a fantastic deal!

Regarding your credit card rate, it certainly can't hurt to call and ask. That's an enormous balance to be carrying at 18%, and the worst they can say is "no." You might want to consider switching the balance to a lower-interest card (or at least threatening to, and see if they budge at all), but I think ultimately it's a waste of time to get caught up playing the rate-chasing, balance-transfer game. The bottom line is, you just need to pay the thing off, as quickly as possible.

I didn't know that about Canadian credit cards. I'm sure someone else posted it before, but I didn't pay attention, or remember, I guess.

So..since you have time to think about things, what about REALLY looking at your budget. Is there anyway you can cut things back and put all your money into those debts? If you both make a good living, and there are only two of you, I'm sure there are places you can cut back. Perhaps decrease your retirement, or stop eating out so much, cable..Kombat already mentioned stuff like that, but I'll just reiterate.

There are people here with huge student loans, and they're making headway. You're not alone. It'll just take a while, that's all.

I thank you both for your insight!

Yes, the interest rate would fall somewhere in between what I pay now, and what their current rate is. Given the circumstances, that might not be the worst thing in the world.

I also want to check with the credit card company first to see what they have to say.

Ideally, it would be nice to not have to touch my equity, and to pay this off without it.

I think Kombat has done a great job of analyzing your situation with the Canadian specifics. And I generally agree with what he and peachy have been telling you. But I want to add something else here.

You say that you racked up all that credit card debt because "hard times hit." Well, that can happen to anyone, but if the hard times are gone you should be looking for a way to work hard to fill in the hole (debt) left rather than just snowplowing the debt by moving it into your mortgage.

I truly think you should put as much as you possibly can into paying off the debt over the next 30 months until you renew your mortgage. It seems like $1000 a month is feasible but maybe a stretch. You just freed up $160 a month you said by canceling insurance that did you little good. I would challenge you to put at least $800 a month extra toward teh deb even if it means both you and your wife work a second job. Then in 30 months when you renew you should get a better interest rate and you will be nearly debt free (excluding the mortgage).

I realize that doing this will take sacrifice but if you just continue as you are, pretending like there is no need to dig out of the hole that your hard times left then you don't seem to have learned from it. You mention that a chunk of that debt is eye surgery. Well, if it were medically necessary I'd think it would have been covered by insurance. If it were just Lasik or something that was optional then I see it as just another sign that your debt/spending situation is on going. We don't need to get into the medical stuff but it should give you something to think about.

Now, if you could put $1000 toward principal last month then it seems like putting $800 or so every month should be possible and will put you in a much better position later.