Debt Consolidation Through Mortgages: A Guide for Brokers

A Guide for Mortgage Brokers to Simplify Payments, Lower Rates, and Strengthen Client Relationships

As a mortgage broker, you are often the first point of contact for clients facing a myriad of financial challenges. Many come to you overwhelmed by mounting debts, struggling to manage multiple payments and high interest rates. This guide is designed to provide an analysis of home equity lending as a powerful solution available.

The Growing Challenge of Consumer Debt in Canada

Before you can offer a solution, it’s vital to understand the landscape your clients are navigating. Consumer debt has been a persistent challenge for households across the country, and the numbers are a key part of the conversation you have with your clients. According to a Q4 2024 report from TransUnion, total consumer debt in Canada reached a historic high of $2.5 trillion, representing a 4.5% year-over-year increase. This growth was driven by increases in both mortgage and non-mortgage debt, with credit card balances, in particular, showing a rapid pace of growth. The average credit card balance for Canadians in Q4 2024 was approximately $4,681, reflecting a significant rise in revolving balances as consumers pay down a smaller portion of their debt each month. These statistics highlight a concerning trend: many people are increasingly relying on debt to manage day-to-day expenses, leading to financial stress and rising delinquency rates. In Q2 2024, one in 23 consumers missed at least one payment, a number that has been steadily climbing. For a growing number of Canadians, a proactive strategy to manage this debt is not just a good idea, it’s a necessity, and you are uniquely positioned to provide that solution.

Debt Consolidation as a Broker’s Tool

At its core, debt consolidation is a financial strategy that involves combining multiple high-interest debts into a single, more manageable debt. For a broker, this process typically involves securing a new loan or line of credit to pay off a client’s existing, higher-interest debts, such as credit card debt, personal loans, or other unsecured debts. The primary goal is to simplify repayment for the client and, most importantly, to reduce their overall cost of borrowing. Instead of juggling multiple due dates and interest rates, they are left with one single, clear payment to manage, which in turn strengthens their overall financial position.

The process is systematic and strategic, beginning with a thorough assessment of your client’s current financial situation. This not only allows you to understand the full scope of their obligations but also to explore the best debt consolidation options available to them. When approved, the new loan is used to pay off all existing, high-interest debts in one go, leaving the client with a single monthly payment, often at a lower, fixed interest rate.

The Power of Home Equity for Debt Consolidation

The “right” debt consolidation method depends on your client’s individual financial situation, including their credit score, the amount of debt they have, and their assets. This is where the power of home equity becomes a game-changer. For a broker, leveraging a client’s home equity for a debt consolidation loan can be the most impactful solution, especially when traditional options fall short.

What is Home Equity? 

Home equity is the difference between the current market value of a home and the amount a client owes on their mortgage. As your client makes mortgage payments and their property appreciates in value, their equity grows. This equity is a valuable asset that can be unlocked to secure a new loan.

How Home Equity Loans Work for Debt Consolidation 

By securing a home equity loan (in many cases referred to as a second mortgage) or a Home Equity Line of Credit (HELOC), a client can receive a lump sum or a revolving line of credit that can be used to pay off high-interest debts. Since these loans are secured by a tangible asset (the home), they typically come with significantly lower interest rates and more flexible terms than unsecured personal loans or credit cards. For clients with non-traditional income or a complex credit history, this asset-based lending approach can provide a clear path forward where conventional financing is not an option.

The Key Benefits for Your Clients

By providing debt consolidation solutions, you offer your clients several powerful advantages that can significantly improve their financial health:

• Simplifying Their Finances: The most immediate benefit is the transition from multiple payments to one. This reduces the mental load of managing several bills and helps your clients avoid missed payments, which can be detrimental to their credit score.
• Potentially Lowering Their Interest Rate: By securing a new loan with a lower interest rate, your clients can reduce the total amount of interest paid over time. This redirection of funds from interest payments to the principal balance accelerates their debt repayment journey, which you can clearly illustrate for them.
• Improving Their Credit Score: As a client pays off high-interest, revolving debts (like credit cards), their credit utilization ratio—the amount of credit they are using versus the amount available to them—can improve significantly. A lower utilization ratio is a key factor in boosting their credit score. According to a TransUnion study on debt consolidation, 68% of consumers who consolidate their credit card debt see their credit scores improve by more than 20 points within a year.
• A Clear Path to Being Debt-Free: A debt consolidation loan typically comes with a fixed term, providing your client with a clear end date for their debt. This can be a powerful motivator, helping them stay on track and maintain responsible financial habits long after you’ve helped them secure the financing.

PHL: Your Partner in Solving Complex Scenarios

While traditional lenders may offer solutions, not every client’s financial situation fits within their rigid guidelines. This is where a partnership with an alternative lending expert becomes a competitive advantage. PHL offers expert guidance and innovative solutions, specializing in alternative financing that helps you navigate complex client challenges by leveraging home equity. With decades of experience in real estate and lending, PHL provides flexible, common-sense solutions and fast approvals, giving you the opportunity to consolidate your client’s debt and help them build a more secure future, even when traditional options fall short.

Case Study: Providing a Path to Freedom for a Toronto Client

• The Scenario: A self-employed contractor and his partner in Toronto were juggling over $80,000 in high-interest credit card debt accumulated from business expenses and household costs. Despite having significant equity in their home and a strong credit history, their variable income made it difficult to secure a consolidation loan from their bank.
• The Challenge: With interest rates on their cards exceeding 20%, their monthly payments were barely covering the interest, making it impossible to reduce the principal. They needed a way to consolidate this into a single, lower-interest payment.
• The PHL Solution: We took a common-sense approach. The clients had a strong repayment history, plenty of equity in their entry-level Toronto home, and sufficient income to service our proposed loan. We provided a second mortgage with a streamlined, transparent process, allowing them to pay off all their high-interest debts with this solution, all in one go. 
• The Partnership: This strategic solution immediately freed up their monthly cash flow and gave them a clear, structured plan to pay off the new mortgage. This is a prime example of how PHL acts as a trusted ally, providing flexible financing when conventional options fall short.

This case study displays how PHL’s flexible and common-sense approach can make all the difference, providing a path forward for clients whose circumstances don’t align with traditional banking models. Partnering with PHL allows you to become a strong contributor in your client’s financial story, providing them with the opportunity to transform their debt burden into a manageable plan. This strengthens your relationship with them and reinforces your reputation as a problem-solver in the industry.

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Disclaimer:

The information provided in this article is for informational and educational purposes only and is not intended to be, nor should it be construed as, financial, legal, or tax advice. The content is aimed at licensed mortgage professionals who are expected to use their own expertise and judgment when advising clients.

PHL Capital Corp. is a mortgage brokerage and administrator, and manages and operates affiliate mortgage investment corporations, and does not provide financial planning services. The scenarios and figures described, including the case study, are for illustrative purposes only and do not guarantee similar outcomes for other individuals. Qualification for any mortgage product depends on individual circumstances, including but not limited to, property value, equity, and credit history. Past performance is not indicative of future results. Interest rates, market conditions, and statistics cited are subject to change without notice. All mortgage applications are subject to approval.

We strongly recommend that individuals consult with their own independent financial advisor, lawyer, and accountant before making any financial decisions.