How a Consumer Proposal Can Affect Your Mortgage Renewal
Financial trouble can hit anyone at any time, and an unstable economy does us no favours. There may be a time in your life when you need to consider a consumer proposal. While it sounds like a daunting option that will put a black mark on your financial record, a consumer proposal can be a helpful tool to get you back on track when you can’t keep up with your payments. Many people who go through a consumer proposal are concerned about how it may affect renewing their mortgage. While it will carry some weight, it won’t obliterate your chances of getting a renewal. You just have to go about it a different way. Let’s take a look at Jim’s situation, and how he got his mortgage renewal after a consumer proposal. For information about consumer proposals and how they may affect your mortgage renewals, call us today.
Jim’s Three Steps to a Mortgage Renewal After a Consumer Proposal
Jim was unemployed for 6 months in 2016 when the economy in Alberta was at a low point. During that time, he was living off his credit cards, but after 6 months, the debt burden became too much for him to manage. Despite being back to work, he could not keep up with all the payments.
Jim met with a bankruptcy trustee and went through a consumer proposal. Based on the advice of the bankruptcy trustee, a consumer proposal was a better option for him because he had quite a bit of equity in his home and going through a bankruptcy would not have been the best option. Jim’s consumer proposal came with $565 payments per month over the course of 5 years.
The difficulty with a mortgage renewal after a consumer proposal is the traditional banks will require 2 years from the date of discharge before approving a mortgage. This means that Jim would not qualify with a traditional bank for 7 years from the time he entered the consumer proposal, because it will take him 5 years to pay it off and then the 2-year window can start.
In late 2017 his mortgage renewal date arrived, and his current mortgage lender offered him a much higher rate of 7.99%. Jim was referred to us through a friend, and we put a 3-step plan in place to help Jim with his mortgage renewal after consumer proposal.
Jim’s Customized Strategy for Mortgage Renewal After Consumer Proposal
Jim owned his home and the value of the home was around $375,000. He owed his current lender $210,000 on the mortgage. He owed $34,000 on the consumer proposal which would be paid off eventually via the $565 monthly payments, however the amount would not be paid off until the year 2022. We worked closely with Jim to create the most effective strategy that makes the most financial sense over the long term.
Refinance with an Alternative Lender
Step one was to refinance his home with an alternative mortgage lender. The interest rate was 4.94%. higher than what good credit borrowers were getting, but lower than the 7.99% that was offered on his mortgage renewal after consumer proposal with his current bank.
We increased the mortgage to $250,000. After paying off the current mortgage of $210,000, we had $40,000 extra, which we used to pay off the Consumer Proposal immediately and get it discharged immediately. This starts the two-year window immediately, versus waiting for the full 5 years after making all the monthly payments.
We took a 2-year term on the new mortgage, and the payments were $1455 per month. This was affordable for Jim, as he was already making the $1125 mortgage payment before, and in addition he was making the $565 per month consumer proposal payment. His payment obligation actually was reduced from $1690 total ($1125+$565) to $1455 total.
Begin Credit Rebuild
Step 2 was for Jim to start rebuilding his credit. The majority of mortgage lenders in the A lending space that have good rates require borrowers to have 2 credit accounts open and re-established for a full two years after a consumer proposal is discharged.
Therefore, Jim opened a secured credit card with Capital One with a $500 limit and got an RRSP loan from his bank for $2500. The $2500 loan proceeds were then put into an RRSP for him which he put into an investment recommended by his bank, and the $2500 loan has associated payments of $110 per month for 2 years, at which time the $2500 would be paid off, and he would still have the $2500 in his RRSP.
Refinance with an A Lender
In step 1 we used the equity in his home to get the consumer proposal paid off and discharged. In step 2 we put a plan in place to rebuild his credit, specifically to target and build the requirements that the majority of Canadian mortgage lenders will require. By successfully completing Step 1 and 2, we were now ready to help Jim refinance into a much better mortgage term.
After 2 years, the balance on the mortgage renewal after consumer proposal that we obtained for Jim in step 1 was $239,350.
We were able to secure a mortgage from an A lender at a rate of 2.49%. Because Jim was super comfortable with the payments of $1454, after the mortgage closed, he increased his payments back up to this level. This reduced his amortization and now he is on pace to have the mortgage paid off in 17 years.
Back on Track
In summary, prior to the consumer proposal Jim was on pace to pay his mortgage off in 21 years. By following our plan and taking action, Jim was able to pay off the consumer proposal immediately, repair his credit, and is now set up to pay off the new mortgage in approximately the same amount of time.
If you need a mortgage renewal after consumer proposal and have equity in your home, you owe it to yourself to have a conversation with one of our experienced mortgage brokers to help you with a customized strategy.
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