The Moores' were a typical young family with a couple of kids who were involved in sports, mainly hockey in the winter and soccer in the summer. The children were talented kids and excelled in hockey making it to Triple A for their age group. Now, anyone who has children involved in hockey at a higher lever know how expensive it is and with two kids actively involved, it put a lot stress on family finances. Needless to say the Moores got themselves into a bit of a financial bind and had accumulated about forty thousand dollars of credit card debt (with monthly payments of $1,200 per month). They also owned a home which they purchased a few years ago and had a mortgage.
They went to their bank to try to get a debt consolidation loan, but the bank turned them down as the maximum banks can re-finance was eighty percent of the value of the home. Feeling desperate they called DMC to see if anything could be done for them. A DMC agent looked at their situation and was able to find a lender that would offer them a second mortgage to consolidate all the credit card debt into one payment with a new monthly payment of four hundred dollars per month. This ended up being the best solution as breaking the mortgage would simply be too expensive. Their DMC agent then coordinated the term of the new second mortgage to correspond with the renewal of the first mortgage, so that when both mortgages came due, they could combine it into one new mortgage.
Thanks, DMC, for helping us relieve our stress and finding a solution to our debt problem.
The Moore family
Consolidating Debt, An Alternative to High Credit Card Rates
Let’s face it; the government of Canada has made so many changes to the mortgage rules in recent years that Canadians can no longer refinance their mortgage above 80% of the value of their home. In addition to the exorbitant penalties charged, the banks have really made it difficult for someone to break a mortgage.
While these mortgage changes might, in theory, be a good thing, the Canadian government has done nothing to curtail the lending of money by credit card companies.
Many Canadians are carrying large, unsecured credit card debt. We see clients paying very high interest rates in the 20-30% range and these balances carry very high payments. This can be very stressful, makes it difficult to make payments regularly, and being just a few days late can really hurt your credit score.
How do the Banks calculate mortgage Penalties:
|Current Mortgage Balance||$300,000|
|Value of Home||$400,000|
|Mortgage Rate currently charged||2.95%|
|Qualifying Rate at time of original mortgage||4.75%|
|Discount from Qualifying Rate||1.8%|
|Remaining Term of Mortgage||3 years|
|Penalty Calculation 3 years x 1.8% = 5.4% penalty or Penalty to Break Mortgage||$16,200|
With such high penalties are there any options available to a borrower?
Actually there are. It may be better to arrange for a second mortgage instead of trying to break the existing mortgage in place.
|Unsecured Credit Card Debt||$40,000|
|Interest Rates Average (24%)||$9,600|
Consolidate all the credit cards into a second mortgage
|New Second Mortgage||$40,000|
|Term to coincide with renewal date of Existing first mortgage||3 years|
|Interest Rate (12%)||$4,800|
|New Monthly Payments||$ 400|
As you can see from this example, a second mortgage would be the best way to go as the cost over the next three years would be less than the penalty to break the mortgage. Then when the first mortgage comes due, we can combine both of these mortgages into a new one at the best rate. This would make it easier for you to afford the monthly payments and preserve your credit.