Should I use home equity to pay off debt?

Posted on 12 December 2021

Written by Ashvin Sharma

If you are a homeowner and have been in your property for a number of years, you probably have some home equity. If you do have equity, it is possible to use the equity as a loan for anything you want to spend your money on. Perhaps you need some additional funds for an emergency, or for a large purchase. Confusingly, taking out this kind of loan from your home equity has several different names. You may know it as a home equity loan, a home equity line of credit (HELOC), a second mortgage, or refinancing your mortgage. In some instances, people choose to pay off their debts including credit card debts using a home equity loan. Using your home equity can be controversial as it can put your property at risk, and it is very dependent on your unique financial circumstances. So, should I use home equity to pay off debt? In this article, we will explore the pros and cons of doing so so that you can decide if it is the right move for you.

What is home equity?

Home equity is defined as the part of your property that you have actually paid for, and therefore own. This is opposed to the part you may still be repaying through a mortgage until your entire mortgage is paid and you own the entire property. You can work out the amount of equity you have in your property by taking away the remaining balance on your mortgage from the value of your property. This will then leave you with the amount of property you actually own. While this is relatively straightforward, actually getting the home equity is not always quite so easy. For instance, not all lenders will give you the full amount of equity in your home. It may also be dependent on your credit score, and other spending behaviour. While you can speak to your mortgage lender to understand your options, if debt is involved you may be better off taking a different approach. It is important to understand why the debt has come about in the first place. In Canada, Licensed Insolvency Trustees are the only professionals legally able to file all forms of debt relief. At Spergel, you can book a free, no obligation consultation with a Licensed Insolvency Trustee. They will work with you to understand your financial situation, and can advise you on the best course of action to take for your debt.

How to use home equity to pay off debt

The first step to using home equity to pay off debt is to figure out how much debt you have in the first place. Do you have multiple debts? In this case, you may want to consider a debt consolidation loan instead. Credit card debt with a high interest rate is the kind of debt we most often see Canadians wanting to pay off using their home equity. In the first instance, you need to work out exactly how much debt you have, including everything from tax debt to car loan debt. You also need to record the interest rate you are paying on each debt, as a home equity loan could in fact have a higher interest rate than your current debts. Now you know how much debt you have, you need to calculate the amount of home equity you have. You can use the calculation we shared above, inputting the required information from your mortgage statement. Now, you can choose which kind of home equity you may want to use. Home equity lines of credit, home equity loans, and second mortgages are the most frequently chosen options. Each option will enable you to pay off money towards your debt, or clear it completely depending on your circumstances. Once you are approved for your home equity loan, you can now use it towards your debts.

Advantages of using home equity to pay off debt

There a number of advantages of using home equity to pay off debt. For instance, you can reduce or clear your debts, meaning you will no longer have to record your payments. You may even be receiving collection calls or a threat of a wage garnishment. Clearing your debt or making substantial payments towards it will either protect you or allow your creditors to cool off. When using home equity to pay off debt, you can usually secure a flexible payment plan that is tailored to your circumstances to make things easier for you. Another benefit is that often you will find interest rates for a home equity loan are much lower than other types of loans like payday loans. This is because it is a secured debt – the lender has your property to fall back on should you not be able to repay the loan.

Disadvantages of using home equity to pay off debt

Where there are advantages, there will always be disadvantages of using home equity to pay off debt. For instance, it is not always suitable for everyone – not everyone will actually have equity in their property and therefore a loan will not be approved. When it comes to taking on a second mortgage, there are often some fees that need to be accounted for. Banks can also be challenging with the concept of a second mortgage, so it may be a good idea to explore going with an alternative lender if you cannot get what you want from your bank. Of course, the main disadvantage is that if you are unable to pay off your mortgage or you find yourself cycling back into financial difficulty, you could potentially lose your home.

Should I use home equity to pay off debt?

It is impossible to say whether or not you should use home equity to pay off debt without reviewing your unique financial circumstances beforehand. For some Canadians, a home equity loan can work out perfectly in terms of paying off niggling debts. For others, it may not be quite the right solution, with an alternative option proving more beneficial. The key thing to note is that if you are struggling so much with debt that you need to consider a home equity loan, it is probably best to look at the source of the problem. Perhaps you are in financial difficulty and need help with a plan to gain debt relief. Even if you are struggling just a little, you should seek help as soon as you can – it can prevent your situation from becoming worse. Licensed Insolvency Trustees can act quickly to assist and advise you on the best action to take to avoid your debt from spiralling. At Spergel, we have helped over 100,000 Canadians begin a fresh financial future, and we can help you too. Alternative debt relief options like a consumer proposal can help to reduce your debt by up to 80% while enabling you to keep your home.

If you are wondering ‘should I use home equity to pay off debt?’, speak to Spergel first. Book a free consultation and one of our experienced Licensed Insolvency Trustees will review your financial circumstances. We can help to provide a solution to your debt so that you can comfortably keep your home while beginning a fresh financial future. Reach out today – you owe it to yourself.


Ashvin Sharma

Ashvin Sharma is a Chartered Insolvency and Restructuring Professional and LIT (Licensed Insolvency Trustee) overseeing all of Spergel's offices in the Greater Vancouver Area and British Columbia. He is also our resident expert on homeownership debt and health debt. In his spare time, Ashvin loves to play sports, spend time with family and friends, and serves as a volunteer coordinator for "Free-Them", a Canadian organization committed to raising awareness about human trafficking.

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