Consumer Proposals – to pay out or not to pay out?
Here are some problems with early payout
We have seen a recent surge of people paying out their consumer proposals earlier than expected, but this may not be the smartest thing to do, and here are some reasons why:
Many of the payouts have come from refinancing real estate. Imagine a scenario where the debtor has an existing $250,000 mortgage on a property that was worth $260,000 at the time they filed their proposal. Today the value of the property has increased to $350,000 and they are able to add $20,000 to the existing ($250,000) mortgage to pay off the remainder balance on their proposal earlier than the anticipated remaining four years.
The client’s interest rates will be higher for two reasons, first there has been a general increase in rates and second the client is now a higher risk client. For the purposes of this example we will assume that rates have risen from 2.5% to 3%.
The client negotiates a new mortgage to simply add the $20,000 for the proposal pay out to the existing $250,000 on the mortgage (we will ignore brokerage and legal fees). The mortgagee has two choices regarding amortization, either amortize over the remainder 20 years or decrease the payment by amortizing over 25 years. By taking the 25-year option the client will save about $220 per month.
If the client chooses the 20-year amortization they will repay $20,000 for the proposal plus an additional $21,650 in interest payments and the costs of registering the mortgage. Should they choose instead to reduce their monthly payments under the 25-year option they will repay the original $20,000 plus an additional $46,223 for interest charges along with fees.
The only advantage to the client is that they will have the proposal come off their credit bureau reports four years earlier, which will allow them access to more debt sooner. The disadvantages should be obvious, increased interest payments, fee payments and the risk that they will get into trouble again with new credit as well as the burden of longer term monthly payments.