One situation that is very easy to solve as mortgage broker, but much harder through a bank, is a debt consolidation. Life is expensive and quickly getting more expensive. Consumers have taken on more consumer debt and continue to do so because of the higher prices for daily necessities.
Today, most clients have existing mortgages at better rates than are currently available. This mean that for now the most economic solution is often to keep the existing mortgage and add a second mortgage to lower the interest rate on unsecured debt.
Last year, it was generally advantageous to refinance the first mortgage and add the debt to the existing mortgage. But due to the increase in rates, today that strategy is generally only economic on a renewal.
For example, clients currently paying 2.69% on a first mortgage, could add a second mortgage at 5.95% (up to $200,000 below 80% loan to value) to consolidate debt, pay for home improvements, pay CRA debt, access home equity for any purpose, etc. The alternative is to refinance the first mortgage at market rates which are significantly higher than 2.69% and increasing the interest rate on all debt.
Second mortgages can be easily arranged with few documents and can close within a week. Fewer documents are required because they are based on the equity in your house and not your income and credit.
One avoidable situation that I have seen too often arises when a client uses all his or her available credit. At that point credit score will fall quickly, making refinancing conventionally with an A lender (650 credit score minimum) difficult. In these situations, consolidating with a second can be a necessary step, to cleanup and improve a client’s credit score before refinancing. When a debt consolidation is done proactively it results in greater savings.
Often home improvements can be a major source of additional debt. Again, my suggestion is to get your ducks in a row and be proactive, to take care of debt consolidations prior to your credit becoming limited and your credit score being impacted.
Clients can use home equity to pay CRA debt which is typically not allowed with many institutional lenders.
The medium-term plan is generally to consolidate the second mortgage into a single mortgage on renewal. Being proactive and securing consumer debt with your house lowers the interest rates and can make the payments much more flexible. By protecting your credit score, consolidating debts can make refinancing much easier down the road.