Escaping Debt Podcast – Mortgage Refinancing – Episode 8

Join David Moffatt and guest speaker, David Clarke as they discuss the merits of using home equity to refinance and pay off debt.

Transcript

David Moffatt: Hello everyone. I hope you’re doing exceptionally well today. Welcome back to the Escaping Debt Podcast. My name is David Moffatt, I’m your host as always. Today, we’ve got a really interesting episode planned. I have a guest in the house actually. Today, we’re completely social distancing. I promise. His name’s Dave Clarke, he’s a mortgage broker. And really what we’re going to be talking about is the benefits of refinancing and how that can help you get out of debt. Now, remember that we believe that no one should have to struggle with the overwhelming burden that debt causes. We simply believe that it is not possible to work for both the consumers and the creditors at the exact same time in an unbiased fashion. That’s why we work for you, not your creditors. So, I have Dave Clark here. Dave, how about you introduce yourself?

 

Dave Clarke: Thanks David for having me. I’m Dave Clarke with the Clarke Mortgage Group. I’ve been a mortgage broker for eight years now and I have offices kind of scattered around Nova Scotia. David, I guess, just to talk about where we met, we met in a networking group probably four years ago, something like that.

 

David Moffatt: Something like that, yes.

 

Dave Clarke: Yes. A lot of my business has been helping people refinance, restructure their mortgages using equity in their home. To try to get their debt wrapped up, to try to get cheaper credit products, just to try overall help their financial situation. And then, I know when David and I met, we just not a – our clients to seem measure really well together.

 

David Moffatt: Yes. Absolutely. It’s a topic that we talk about often. I know kind of just of the podcast and kind of in the real world is, there’s a lot of different ways to solve debt. Most people seem to gravitate towards just traditional going to the bank and trying to get that loan or bankruptcy. They don’t seem to see anything in between. I know that in talking with clients on my end, most people aren’t even aware they can refinance their house. Do you experience that much? Much I’m sure you don’t because if they’re going to you, they know they want a mortgage. (2:00) How does that work in your day-to-day life?

 

Dave Clarke: I agree that not most people don’t know, I guess, the power of what kind of credit products are available to them. Sometimes, especially in the rural communities that I work in, it’s just kind of like the random bank that’s in the area and if they said no, no one can do it type of thing. So, to kind of take it further, I don’t know if it necessarily that they don’t think they can refinance. But in my experience and I talked to a lot of people who have just been kind of discouraged or declined, and they don’t know about what options are available. There are some people that don’t know they can refinance their homes, but there’s a lot of people that have had such a negative experience over their last five, ten years that they wouldn’t even think as possible. And then, that’s when they don’t kind of reach out right away to refinance.

 

David Moffatt: Yes. Absolutely. I’m sure you get a lot on the opposite side of the table to that think they can refinance. They bought their house two, three years ago and then they come to you and say, “Hey, I want to grab some money out of my house to pay off my debt.” We both know that doesn’t necessarily always work unless, there’s been a massive uptick in the economy, which certainly hasn’t happened in Halifax and probably, isn’t going to happen anytime soon with COVID.

 

Dave Clarke: Yes. You’re exactly right. It happened in the opposite side to where people come in. They think they can take the equity out of their home, but they don’t necessarily understand the rules. You can buy a house with 5% down, but you can only refinance up to 80% which means that you need to have a 20% equity stake there. Sometimes that takes 10 years to even make it, so you can just get the money that you have owed. It’s something they called a switch which is a little different. But yes, a lot of people don’t understand how long it takes to pay down your mortgage enough to do it. And then, there’s some obvious exceptions like, you made major renovations to your home and things like that. But yes, it takes a little while.

 

David Moffatt: Yes, for sure. Are you able to run through an example (4:00) of how somebody would use refinancing to help their situation? I know it’s kind of on the spot. We’ve literally talked about doing this five minutes ago. [laughter] As best as you can, maybe just around numbers to kind of go through scenario.

 

Dave Clarke: Okay. If you have someone who’s house is worth 200,000 and they owe a 100,000 on it, you can refinance it up to 80%, that’s a 160. So, in that situation, you actually have $60,000 of usable equity. You got to get Lauren appraisal involved but just for my quick easy math in my head, we’re going to say 60. In that scenario, if you have credit cards at 19.99%, we can look at paying those off if we have some type of loans. Sometimes it’s like a car loan that’s got a year left but still has a big monthly payment, or some consolidation loans, or some high interest stuff like Fairstone or things like that. We can pay those off. Sometimes we could take money ought to do renovations. A perfect example that happened recently is like, I helped somebody build an In-Law Suite which actually made their whole finances cheaper because their parents moved in. Those are examples about how you can refinance and go up to 80% and you can do something with that money. The question is, what do you do with it? If you’re paying off high-interest debt or something with a very high monthly payment, sometimes you can really cut your monthly payments in half or less.

 

David Moffatt: Yes. This is really interesting and one of the things that you touched on there was was paying something off that had a really high payment. Now, I know we’ve had this conversation, I don’t know how many times about how interest rates not always, but are often times completely irrelevant to the conversation. If somebody would just prioritize paying off their 0% interest car loan over their 8% personal loan, for example, they would be in a much better situation. So, I don’t want to steal the thunder. Are you able to kind of comment on that and how mortgage refinancing (6:00) can kind of accelerate somebody’s entire financial plan.

 

Dave Clarke: Yes, you’re exactly right. The biggest thing that I keep talking about is how cash flow is the most important thing. Interest rates are definitely a component that you need to pay attention. But when you look at someone comes in and they’re struggling and they’re trying to think of a better situation, it’s because of the cash flow. That’s how they’re feeling it. We’re looking at a truck loan for instance, you get a truck loan for 70 grand. It could have a monthly payment of what you see 800, 900 bucks a month type of thing.

 

David Moffatt: That’s if they take it over eight years. Yes. [laughter]

 

Dave Clarke: Yes. Sometimes a thousand.

 

David Moffatt: Yes.

 

Dave Clarke : You look of that again, obviously, a thousand for a simple math. When you have only a year left on that, you might only owe $10,000, $12,000, $15,000, but the monthly payment on it is a thousand. So the question is, if you refinance and pay off that $10,000, $15,000 loan, what can you do with that thousand dollar a month payment? If you refinance it and you just spend thousand dollars a month, you’re not going to see that positive change. You eventually are going to need to get another car loan and that might not be the best thing to do. If you use that thousand dollars to then take that towards your next loan or your high-interest credit cards and you use that to really snowball pay off the rest of your debt, that can make a huge impact in that time frame between then and when you might need another car a year or two.

 

Dave Clarke: Your finances can be in much better shape because you spent that time paying off these high interest credit cards. Which if you didn’t do it, you might be still paying off your car loan and doing interest-only payments on your credit card. So, it depends what you do with the cash flow. There’s a right way to do things for paying debt off and when I say right thing, I just want to put a little disclaimer here. There’s a big difference between what we say about paying off debt and what real life is and what (8:00) fun is and all that different stuff. There’s sometimes a balance between that. In that example of a thousand bucks a month, we might be able to do some type of aggressive debt payoff with 600 of it. And if the other 400 meant that you could take a vacation with your family and was your goals. Those are things that I just need to know about, so it can be all part of the plan. But yes, cash flow is important, but what you do with it long-term really is the thing that makes a big deal.

 

David Moffatt: Yes. Absolutely. I think you kind of hit it right on the top of the head of the nails – is that an expression?

 

Dave Clarke: It is now.

 

David Moffatt: Awesome. Love it. Is this whole concept of – there’s the mathematically correct thing to do. If anybody wants to know the mathematically, the most mathematical accurate way to pay off debt as you start with the highest interest rate, you focus on that and you throw everything extra on it. There’s been a whole bunch of studies that have shown that, that’s actually a very ineffective way to pay off debt, and the reason why is because of human behaviour, right? Another method that’s often talked about is the debt snowball which is where you start with the smallest balance first and then work your way up. There’s been a lot of studies on that, that show that it is significantly more effective than what’s called the debt avalanche which is where you start with the highest interest rate first.

 

David Moffatt: But I think, I know we both agree on this. I think those are very good ways to start and look at your finances, but it doesn’t necessarily mean that, that’s the most accurate thing to do. For example, paying off the smallest balance first might only free you up a hundred bucks a month, whereas, if you focus on that truck payment of a thousand dollars. Imagine the choice that you now have, the safety that you now have if something goes wrong. What happens if your income drops a thousand bucks a month like it did for a lot of people during COVID, right? Somebody who would have prioritized the smallest balance or the highest interest rate might not necessarily of focused on that vehicle. So, I think there’s this human element as well, that has to come into things. I think you’re perfectly right.

 

Dave Clarke: The reason why refinancing can be helpful is that (10:00)  in my experience when I look at debt payoff plans, there needs to be some type of element that plays in the freeze up cash flow at all. So, to be able to focus on things, you can do it or you, again, we’re looking at the snowball and you’re picking your smallest credit card and you pay it off. That can take a while, that can be kind of discouraging sometimes. If you do something like a refinance or a proposal or you get a raise or there’s some type of cash flow change, that’s what I find helpful when you put a plan in place. It’s one thing to do budgeting and stuff like that. But I find there needs to be something that kind of triggers some of this extra cash flow that you can use to even pay off debt, especially for those that are kind of going paycheck to paycheck.

 

David Moffatt: Yes. Absolutely. I mean, my biggest recommendation to anybody that struggling with debt, that if you can’t pay your debt off in at least five years, I’m talking unsecured stuff. So obviously, a mortgage for twenty years, I don’t expect you to be able to pay it off with five years over, that would be really cool if you could. If you’re going to take more than five years, you have to consult a professional. Now, who you go and see is going to really depend on your circumstance. If you have a ton of equity, that might be a mortgage broker. If you’ve got a ton of assets out there, although there’s an Astrix on that, you shouldn’t be selling assets to pay off debt. You might want to go see a financial advisor. If you don’t know then, you want to come see debt specialist. But really, what we’re talking about mainly is for people that if they refinance, if they restructure, if they do some sort of change, will actually be able to afford what they’re doing after the fact. Have you ever – I don’t really need to ask question I know for a fact. What happens when somebody’s credit is so impacted, but they have equity in their home? How does that work? (12:00) What opportunities are available to them?

 

Dave Clarke: There’s three different residential to kind of types of lending. There’s A lending, B lending and there’s private lending and then, additionally on that there’s commercial. To start off, if you’re looking for mortgage advice and even if you were declined in the past, you got to ask that simple question. Can you do A, B private or commercial? If they’re missing one of those components then it’s just – keep checking because there’s stuff out there. That’s just kind of a question for the consumers to ask. If you have damaged credit, typically, what that plays into is what you’re able to do with an A lender. That’s what the whole kind of credit profile is really based on when you talk to mortgage professionals is whether or not in A lender like the big banks or the big model lines can do it. If it’s damaged below what we can do with them and if it’s not realistic that waiting and doing a little for tweaking, we’ll fix it. You have a ton of equity if you’re in an urban area like HRM or other urban areas in Canada, you can go to B lenders. They typically do four and a half six and a half percent rates. If you’re in a rural area like I live, you don’t have that B lender at all. You got to go right from A lending to private expensive money. So, if you have damaged credit and lots of equity, what I always say is, it’s not whether not I can get you a mortgage, it’s whether or not it makes sense. Sometimes it does, sometimes a 12% can pay off a 26% product and it makes a ton of sense.

 

David Moffatt: Or that 0% interest truck that’s cost you an absolute fortune on a monthly basis.

 

Dave Clarke: Yes. An example that is, if we think we could fix your credit in a year or two to go to A lender. We could pay off something with a thousand dollar a month payment like an older car loan. Sometimes that gives us the cash flow we need to fix your credit. (14:00) Maybe the timelines work perfectly there that we can get that bought out with a normal lender, but it just plays into the strategy. Does it make sense. If I get you a mortgage and we pay off something to fix anything. Not to keep going back to paying off the car loan, but it’s a perfect example of something that needs to make sense. Paying off a maxed out credit product might not help the issue, if the only reason we use a credit card is because we have no cash flow.

 

David Moffatt: Yes. Sorry to interrupt, but that’s why I have a really hard time with “traditional advice”, right? If you would go to speak to your traditional financial advisor, they’re going to say, “Well, it makes no sense to pay off that 0% interest car loan. You can make so much more money by either paying off this credit card or this debt or investing the money.” The challenge behind this is that just, yes, the math makes sense, but real life doesn’t match up with that math, right? I’m actually writing a book on this whole kind of topic. But at the end of the day, if everybody followed the math the way it’s supposed to be done, there wouldn’t be any financial difficulties at all. But it’s simply not true, 50% of Canadians were living paycheck to paycheck, right? Anyway, just an aside. Sorry continue.

 

Dave Clarke: Yes. Things need to make sense. There needs to be a plan. When you talk to your financial professional, it’s kind of my advice for all financial professional, if we don’t know the story, it’s hard to give advice on it. We need to know kind of what happened to cause the debt. What we could do differently and why it’s not going to happen again. Those are kind of the key elements when there’s damage credit and we’re trying to make a plan or even if there’s not damaged credit. You’re just feeling like you’re going paycheck to paycheck and we need to make a plan, because what David is saying is right. Say, “Hey, let’s pay off your 20% credit card with a mortgage.” (16:00) Saying that out loud sounds like a perfect idea. But if I don’t know that the reason it went up is because your kids going to school or I don’t know that the reason that the credit card went up is that you did renovations and you still need to get your roof done. If I don’t know the key causes, my fix isn’t going to be an actual fix. What we’re doing is we’re using your equity and we’re not putting in a good realistic plan and I’m all about realistic plans.

 

David Moffatt: To kind of add to that, not only might it not kind of solve the problem, you might not even be able to get them a product, right? I know we’ve had conversations about this where you’ve had a client that has a really, well, good story. It makes sense in the lenders have made exceptions based upon those stories where if you don’t know the story from the get-go, how are you supposed to even try to get this exception, right?

 

Dave Clarke: Yes. That’s absolutely right. When David says a good story to what I need, is I need something that makes sense. If it’s something that there was a job loss or someone was sick or those type of things, a business failed and you all bunch of back taxes or something like that, which is a one off. It’s a very good example of me to show those last questions. I answered, what happened? How did it change and why is not going to happen again? That being said, if it’s something where it was just over spending, not budgeting or things like that and it was a slow kind of build up of debt and you kind of lost control of it. You couldn’t get your way out of it. That is still the story I need to hear. What I have a really hard time getting approved is when I don’t know what happened. I can’t explain it to the underwriter. Underwriters are all very much human. So, they start imagining what happened. They start coming up with their own opinions. That’s the worst thing that we can do. We need to make sure that everything is answered before it ever hit someone’s desk. (18:00) The story is very important and I don’t think people necessarily think that. I think some people think things are a need-to-know basis. But I find in my business to make things successful, you always need to overshare with me. [laughter]

 

David Moffatt: Yes. I understand why this happens so, because I look at my own personal life right in. Whenever I go meet with a professional, I don’t want to tell them the whole ins and outs of everything that I want to do and want. I just want what I want, right? But I think you’re very correct that people need to really take a step back and understand kind of what they’re doing, right?

 

Dave Clarke: Yes. It almost seems like I’m digging sometimes for information. What I’m trying to do, is I’m trying to have a complete story. If they’re – I’m just going to do a common example that comes up, is that there’s some bank errors that happen every once in a while. Where you think of payments going to come out a certain day and it doesn’t and that messes up things sometimes. I hear that a lot, but what doesn’t work is that if I only explained one late payment when there is five. If I explain one late payment when there’s five, there is no story. Then, I need to know exactly how the second late payment happened. I need to know how the third one and the fourth and the fifth. What happens if I don’t is there’s not a complete story and again, the underwriters going to start making assumptions and there might be a very good reason in there that I just don’t know about yet. Those are the type of things that I just need to know if you had late payments for three years and I just have kind of one thing that happened. I can’t explain it to anybody. I’m going to keep saying this over and over again. I need to explain, what happened? How we fixed it or going to fix it. Why we know it’s not going to happen again. If we can’t prove those three things, it’s very hard for me to prove doing underwriter is a good decision to approve it. That’s why it’s so important for me to know the story.

 

David Moffatt: Yes. It makes perfect sense, right? It doesn’t –(20:00) the idea is if there was a problem in the past, has the problem stopped? What was the reason for the problem and kind of move forward from there. I think we share a very similar approach in tackling kind of situations in the approach that we go through, right? Really identifying the problem that the individual has. Designing a solution around that and then, implementing that solution at the end of the day. Is there anything else you want to cover on mortgages? What do you think people should need to know as it relates to debt and mortgages?

 

Dave Clarke: What I think people need to know is to rely on professionals and to go through their options. For instance, if somebody has lots of equity in their home, many times I can do something. If they don’t have lots of equity in their home and they need to do something, I’m very likely not the answer, but I know people that are the answer. I know Dave has the same way of working at things. But the first step there was to reach out to somebody. It is very hard to research mortgages online. I’m not saying you shouldn’t, but there’s actually some nuances and some stuff in the mortgage industry that you just learn from experience and not because it’s written on a piece of paper. That makes it kind of difficult to be able to navigate it without a professional. That doesn’t mean that every mortgage person you talk to is going to know it all. Maybe, talk to a bunch of them until they feel comfortable with someone. But it is to reach out because it’s very hard to know it on your own. I’m just going to do a quick example.

 

Dave Clarke: The interest rates that you see online are not the interest rate you’re going to get on a typically on a refinance. There’s something called a high ratio rate and something called a conventional rate. The high ratio rate is a CMHC insured or one of the other insurers mortgage. CMHC insurance comes into place when you have (22:00) less than 20% down when you buy a house or if you already have it because you never got rid of it and you’re looking into switch and do things at your renewals. That’s the interest rate that everyone advertises. If you go online and you do your homework and you try to find the best lender for a refinance, the rates you see online, it’s very likely you’re not going to get it. The lender that you find online with the best rate might not even do refinances. It’s not a bad thing to do the homework. It’s just to explain those, there’s nuances there, which you may want to have some professionals to bounce ideas off of. That’s kind of like the first step that I really recommend when somebody’s looking for some financial advice.

 

David Moffatt: Love it. Kind of a big thing that I caution people on whenever they’re looking to obtain mortgages to really make sure that they’re not turning unsecured restructurable debt into mortgage debt that is then tied against their house. This kind of goes back to our entire conversation about really making sure that the solution actually works for you, rather than just simply jumping into the first solution that’s offered to you. I recommend that you just talked with professionals. Typically speaking, somebody that brings these things up, is consciously thinking about it. People had don’t bring it up or are probably not thinking about it as much as they probably should, right?

 

Dave Clarke: Yes. Just one of the piece of advice is, some high interest loan companies out there that advertise quite well, it’s pretty easy to get funds. Just caution that some of these high interest loan companies that you see where you can get these 26% rates with it. It is quick and easy money, but I am shocked over and over again when clients come to me and they have these high interest loans. How they just didn’t know that some of them were attached to their house. It didn’t know what the interest rates were on some of them. If you’re getting an offer at anything (24:00) at 26%, just reach out to a few people just to see what else is out there because in a lot of cases, I found that there is alternative or there’s other solutions. That’s my only thing that I really caution, so not to be too negative. I find there’s a lot of good professionals, financial professionals in the world, like Four Pillars or financial advisors or mortgage brokers. But yes, just caution some of those 26% loan companies.

 

David Moffatt: Yes. Love it. Where can people find you Dave if they want to reach out and ask the mortgage questions?

 

Dave Clarke: You can find me on Facebook, Clarke Mortgage Group. My website is Theclarkemortgagegroup.com. My phone number is 902-482-8808. We’re a team of four, and we do all over Canada, but our offices are scattered around Nova Scotia. Any questions just feel free to reach out. The very worst case scenario that I can recommend you to someone and give you some information. So, love to talk to you.

 

David Moffatt: Absolutely. Love it. Well, thanks for being on the podcast. I really appreciate it. We’re going to have to make this, maybe a reoccurring segment because I know that mortgages and debt restructuring are always very much tied. Everybody wants to buy a house and I completely understand that. Maybe, we’ll get in and talk about kind of the credit impacts of kind of insolvency is in restructuring and how that impacts abilities to get mortgages.

 

Dave Clarke: Yes, perfect. Thank you for having me.

 

David Moffatt: Awesome. So, everybody thank you very much for listening. You’ve been listening to this Escaping Debt Podcast and remember that we believe it’s simply not possible to represent both the consumer and the creditors at the same time in an unbiased fashion. And that’s why we work for you, not your creditors. We’ll catch you in the next episode.(25:44)