*This post was created in collaboration with Alpine Credits
Do you want to pay off your consumer proposal earlier than planned, so that you can start rebuilding your credit sooner? In Canada, some lenders offer specially designed loans for consumer proposals, but they often come with very high interest rates. Fortunately, there are lower interest rate options that involve using your home equity to pay off debt, including consumer proposals.
Key Points
- If you’ve accrued enough home equity, you may consider using it to pay off your consumer proposal.
- Lenders may require that your consumer must first be completed before you can qualify for a home equity loan. Other lenders may simply require that you have sufficient home equity to qualify for a home equity loan to pay off your consumer proposal.
Can You Use A Home Equity Loan To Pay Off A Consumer Proposal?
Home equity loans and HELOCs are very flexible in terms of how the funds can be used. You can use your loan for almost any purpose, including paying off a consumer proposal.
However, the problem here lies in qualifying for this type of financing while in a consumer proposal. More specifically, lenders often require that consumer proposals be completed before lending.
Some lenders may require as long as two years or more to have passed after a consumer proposal is completed, while others may accept a loan application immediately after the borrower has completed their consumer proposal.
What Is Home Equity?
Home equity simply refers to the value of your home that you technically owe. In other words, equity is the difference between the current value of your home and the amount you still owe on your mortgage.
For instance, if your home is worth $750,000 and your remaining mortgage balance is $400,000, you would have $350,000 in equity:
$750,000 (property value) – $400,000 (mortgage balance) = $350,000 (home equity)
You may be able to borrow part of this equity to pay off your consumer proposal.
What Do You Need To Qualify For A Home Equity Loan While In A Consumer Proposal?
Qualifying for a loan while in a consumer proposal will be difficult. However, for secured loans like a home equity loan or HELOC, you may have a better chance of qualifying due to the security it provides the lender. Here are some of the requirements to borrow using your home equity:
- Home Equity Requirements – You need at least 20% equity in your home to get approved for a home equity loan in Canada.
- Income Requirements – Income requirements for a home equity loan vary among different lenders. Some lenders may require substantial income and steady employment, while others may accept non-employed forms of income, such as Employment Insurance (EI) benefits and pension.
- Credit Score Requirements – Generally speaking, lenders require borrowers to have a credit score of at least 660 for home equity loan approval, though some lenders may accept lower credit, depending on other factors.
Where Can You Get A Home Equity Loan While In A Consumer Proposal?
Those in a consumer proposal will have an R7 rating on their credit report. This can make it difficult to get a home equity loan from a bank. In such cases, working with an alternative lender may be your best option. However, the interest rate that comes with these loans may be higher due to the increased risk the lender is taking.
If you do decide to take out a home equity loan or HELOC to pay off your consumer proposal, consider a lender like Alpine Credits.
At Alpine Credits, your credit history and income won’t affect your loan application. Instead, your ability to get approved for a loan is based on the amount of equity you have in your home.
As long as you have enough equity, you can get approved with Alpine Credits in less than 24 hours. Then, you can use the funds to pay off your consumer proposal.
Types Of Home Equity Loans You Can Use To Pay Off A Consumer Proposal
There are a few ways that you can use your home’s equity to pay off your consumer proposal.
Home Equity Loan
With a home equity loan, you borrow a lump sum of money using your equity as collateral. Then, you’ll repay it in installments until the full amount is repaid by the due date stipulated on your contract.
This is a good option for those who can afford to make consistent payments. If not, you risk losing your home.
Home Equity Line of Credit (HELOC)
With this arrangement, you’re still using the equity in your home. But rather than getting one lump sum that you pay off in regular fixed installments, you’ll be approved for a specific credit limit that you can withdraw from.
Similar to a credit card, you can withdraw as much or as little as you need from your HELOC. Moreover, you’re only required to pay interest on the amount withdrawn. Once that amount is paid back, you can withdraw from the HELOC again and again.
Pros And Cons Of Using A HELOC To Pay Off A Consumer Proposal
There are a handful of benefits to using a HELOC to repay your consumer proposal. But there are also some drawbacks to consider:
Pros
- Flexibility. You can borrow as much or as little equity as you want from your HELOC. Once you repay what you borrowed, you can continue to withdraw from your line of credit whenever you need to, including to pay off your consumer proposal or to coincide with your proposal’s payment due dates.
- Lower interest rates. Your home is a valuable asset. Because it’s tied to your HELOC, lenders are more likely to offer lower rates for this type of financing than for unsecured loans. Securing a low interest rate is key to using a loan to pay off a consumer proposal early.
Cons
- Temptation to withdraw too often. If your spending habits have not improved since filing your consumer proposal, then a HELOC may not be the best option because of the flexibility of withdrawals that it allows.
- Variable rates only. HELOCs only come with variable interest rates. That means your rate could increase if the Bank of Canada’s prime rate increases.
Pros And Cons Of Using A Home Equity Loan To Pay Off A Consumer Proposal
Like a HELOC, there are a few good reasons to use a home equity loan to pay off a consumer proposal. However, there are also a couple of downsides to be wary of:
Pros
- Lower interest rates. Much like a HELOC, a home equity loan typically comes with lower rates than personal loans or other forms of unsecured credit thanks to the value of the collateral.
- Fixed monthly payments. Your loan payment will remain unchanged over the life of the loan. These consistent payments make bill payments and budgeting easier, which is a bonus if you have trouble managing your finances.
Cons
- Risk of losing your home. Since your home collateralizes your home equity loan, you could be at risk of losing your home if you default on the loan.
- Minimum equity criteria. If you don’t have at least 20% equity in your home, you won’t qualify for a home equity loan.
Can You Pay Off Your Consumer Proposal Early?
If you’re looking to borrow money from your home equity to pay off your consumer proposal, you may even go so far as to repay it early.
It’s possible to pay your consumer proposal early if you have the financial means. Whether you use the money you already have or borrow from your home equity, you can use the funds to pay your consumer off early without penalty.
Why Pay Your Consumer Proposal Off Early?
Your credit score will take a hit as a result of your consumer proposal. You can only start rebuilding your credit once your consumer proposal is complete. The sooner you complete your consumer proposal, the sooner you can rebuild your credit.
Other Financial Sources To Pay Off Your Consumer Proposal
If you don’t have enough equity or are not a homeowner, there may be other ways to access extra funds to pay your consumer proposal.
Some loans are meant specifically to help individuals pay off their consumer proposals. Specifically when looking to pay these proposals off early. However, these consumer proposal loans often come with very high interest rates, since they’re typically unsecured loans not backed by a valuable asset.
This is why a home equity loan may be a better option when borrowing money to pay off your consumer proposal. Since you’re securing the debt against your home, you’ll be more likely to get a much lower interest rate, making your loan more affordable.
Access Your Equity To Cover Your Consumer Proposal Payments
If you’re considering using your home equity to help pay off your consumer proposal, we can help match you with the right lender.
Consumer Proposal And Home Equity FAQs
Do I have enough equity for a home equity loan?
How much can I borrow against my home equity?
Can I use a cash-out refinance to pay off my consumer proposal?
Can you pay off your consumer proposal early without a loan?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
