Many Canadians are struggling with debt and with the Bank of Canada interest rates increasing that struggle may become even worse as time goes on. However, there are options available for debt consolidation — particularly if you own your own home.

If you are a homeowner, a scenario you may have considered to manage your debt is a mortgage refinance. But there’s another option that more Canadians are choosing than ever before — a Consumer Proposal. If you’re struggling with debt and own a home, what’s the better option — a mortgage refinance or a Consumer Proposal? We’ve got the details to help you decide.

1. Mortgage Refinance

We’ll start by defining what exactly a mortgage refinance is. Some confuse a mortgage refinance with a second mortgage, but it isn’t the same thing. A mortgage refinance is the process of replacing your existing mortgage (or mortgages) on your property with a new mortgage, generally with different terms. For example, say you have a mortgage of $200,000 with Lender A at a 7 per cent interest rate, but you discover that you can refinance your mortgage with Lender B for $200,000 at a 5 per cent interest rate. You can use the loan from Lender B to repay Lender A and then continue to pay back Lender B at a lower interest rate, saving you money over the long run.

You can also use a mortgage refinance to pay off debts, provided you have enough home equity available. Let’s say you had that $200,000 mortgage loan from Lender A at 7 per cent and also had $20,000 in credit card debt. You then find out you can get a loan from Lender B for $220,000 at an interest rate of 5 per cent. So, you pay back Lender A and you pay off your credit card bills and then continue to pay back Lender B, again at that lower interest rate. Now you only have one debt to pay off and will again be saving more money over time.

2. Consumer Proposal

A Consumer Proposal is an offer to your creditors to reduce your debts. For example, if you owe $50,000 in debt, a Consumer Proposal may offer $15,000 to your creditors to satisfy your debts, provided you can prove that you don’t have the ability to pay in full. If your creditors accept your Proposal, you can then proceed to make a single payment over an interest-free term of up to five years. In order to qualify for a Consumer Proposal, you need to have debts exceeding $8,000 but not more than $250,000 and you must demonstrate the ability to be able to repay a portion of your debt. Unlike a bankruptcy, a Consumer Proposal can be paid in full at any time. However, a Consumer Proposal does affect your credit score. Consumer Proposals are administered by Licensed Insolvency Trustees, who have a legal obligation to maximize the return for your creditors and get paid a portion of what you pay. Get your own financial advice by speaking to an independent financial firm, such as DebtCare Canada.

3. Mortgage Refinance Consumer Proposal

Now that you know the difference between a mortgage refinance and Consumer Proposal, how can you decide what the best option is for you?

The first consideration can be how deep in debt you are. If you have a significant amount of debt, but don’t have the equity available in your home, a Consumer Proposal may be the option for you as a mortgage refinance wouldn’t allow you enough money to get your head above water.

A Consumer Proposal is advantageous when there is more debt and less equity whereas a mortgage refinance is favourable when there is more equity available. Also, credit plays a role in your ability to refinance a mortgage. If you are loaded in debt, have been making late payments, and/or have bruised your credit, that will have to be resolved before many lenders will look at you for a mortgage refinance – unless you have more than 20 per cent equity.

If you’re not sure whether a mortgage refinance or Consumer Proposal is right for you, or want to explore more debt consolidation options, DebtCare Canada can help. We perform an independent review of your financial situation and make practical financial recommendations that will work for you.

Call us today at 1-888-890-0888 or visit www.debtcare.ca to take a free, online assessment.