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I'm a Canadian divorcee who walked away from marriage with debt. I have a great income, but I owe $60K on a line of credit and credit card debt as a result of litigation. I pay $1,500/month in rent.

Should I try to buy in a rising real estate market and hope to roll in my other debt, or rent and slowly chip away at my personal debt?

  • What are the interest rates on your line of credit and credit card debts? – John Bensin Aug 4 '13 at 1:24
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    Can you spell out what that means? How do you 'roll in' the debt? Where does the down payment come from? – JTP - Apologise to Monica Aug 4 '13 at 20:11
  • Sounds like a gamble. You have no way of knowing the real estate marked will climb and if it does for how long. – JohnFx Aug 5 '13 at 3:31
  • What the housing market is doing is irrelevant here. All that matters is how the housing market will do in future, which you cannot predict or infer from its current performance. – Mike Scott Feb 17 '16 at 13:34
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The only way to "roll" debt into a home purchase is to have sufficient down payment. Under the "new" lending rules that took effect in Canada earlier this year, you must have at least 5% of the purchase price as a down payment. If you have $60,000 in additional debt, the total amount of mortgage still cannot be greater than 95% of the purchase price. Below is an example.

Purchase price of home $200,000. Maximum mortgage $190,000 (95% of purchase price) Total outside debt $60,000

That means the mortgage (other than the current debt of $60k) can only be $130,000

This means you would need a down payment of $70,000.

Also keep in mind that I have not included any other legal fees, real estate commissions, etc in this example.

Since it is safe to assume that you do not have $70k available for a down payment, renting and paying down the debt is likely the better route. Pay off the credit card(s) first as they have the higher interest amount.

Best of luck!

  • Good answer, and welcome to money.SE! Feel free to read the tour page and let us know if you have any questions. – John Bensin Sep 3 '13 at 19:12
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What you propose is to convert unsecured debt into secured debt. Conversion of unsecured debt into secured debt is not generally a good idea (several reasons). The debt you currently owe does not have assets securing the debt, so the creditor knows they are exposed to risk, and may be more willing to negotiate or relax terms on the debt, should you encounter problems. When you provide an asset to secure debt, you lose freedom to sell that asset. When you incur debt their is usually a spending problem that needs to be corrected, which is typically not fixed when a refinance solution is used. You do not mention interest rate, which would be one benefit to conversion of unsecured to secured debt, so you probably are not gaining adequate benefit from the conversion strategy.

This strategy is often contemplated using 'cash-out' refinancing to borrow against a home you already own, and the (claimed) benefit is often to lower the interest rate on the debt. Your scenario is more complicated in that you have not purchased the home (yet). Though it may be a good idea to purchase a home, that choice depends on a different set of considerations (children, job stability, rental vs. buy costs, lifestyle, expected appreciation, etc) from how to best handle a large debt (income vs. expenses, how to increase income or reduce expenses, lifestyle, priorities, etc).

Another consideration is that you already have a problem with the large debt owed to one (set of) creditor(s), and you have a plan which would shift the risk/exposure to another (set of) creditor(s) who may have been less complicit in accruing the original debt. Was the debt incurred jointly during the marriage, and something you accepted responsibility to repay?

You mention that you make great income, and you specify one expense (rent), but you neither provided the amount of income, total of all your expenses, nor your free cash flow amount, nor any indication of percentages spent on rent, essential expenses, lifestyle, nor amount available to retire debt. Since you did not provide specifics, we can take a look at three scenarios,

  • scenario #1, $4000/month income

    rent        $1500/month (37% of income)
    essentials  $ 800/month (20%, utils, food, transportation)
    lifestyle   $ 800/month (20%, clothes, entertainment, cellphone, etc)
    remainder   $ 900/month (23%, save, pay debt, etc)
    
  • scenario #1, $6000/month income

    rent        $1500/month (25% of income)
    essentials  $ 900/month (15%, utils, food, transportation)
    lifestyle   $1200/month (20%, clothes, entertainment, cellphone, etc)
    remainder   $2400/month (40%, available to save, pay debt, etc)
    
  • scenario #1, $8000/month income

    rent        $1500/month (19% of income)
    essentials  $1200/month (15%, utils, food, transportation)
    lifestyle   $1200/month (15%, clothes, entertainment, cellphone, etc)
    remainder   $4100/month (>50% available to save, pay debt, etc)
    

Depending upon your income and choices, you might have < $500/month to pay towards debt, or as much as $3000/month to pay towards debt, and depending upon interest rate (which OP did not provide), this debt could take < 2 years to pay or > 5 years to pay.

Have you accepted the responsibility for the debt? It will be a tough task to repay the debt. And you will learn that debt comes with a cost as you repay it. One problem people often encounter when they refinance debt is they have not changed the habits which produced the debt. So they often continue their spending habits and incur new unsecured debt, landing them back in the same problem position, but with the increased secured debt combined with additional new unsecured debt. Challenge yourself to repay a specific portion of the debt in a specific time, and consider ways to reduce your expenses (and/or increase your income) to provide more money to repay the debt quicker.

As you also did not disclose your assets, it is hard to know whether you could repay a portion of the debt from assets you already own. It makes sense to sell assets that have a low (or zero) return to repay debt that has a high interest rate. Perhaps you have substantial assets that you are reluctant to sell, but that you could sell to repay a large part of the debt?

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"Buy and Hope" is a common investment strategy. It's also one that will keep you poor.

Instead of thinking about saving money to put against a credit card or line of credit using your own job and hard-earned dollars, why not use someone else's money? If you have enough of a down payment for a property of your own, consider a duplex, triplex, or 4-plex where you live in one of the units. Since you will be living there you only need 5% down as opposed to 20% down if you do not live there. This arrangement gives you a place to live while you have other people paying your mortgage and other debts. If done properly, you can find a place that is cash-flow positive so you basically live rent-free.

This all assumes you have a down payment and a bank that will work with you. Your best bet is to discuss your situation with a mortgage broker. They know all the rules, and which banks have the best deal for you. A mortgage broker works on your behalf and is paid by the lending institution, not you.

There are various caveats with this strategy, and they all revolve around knowing what to do and how to execute the plan. I suggest Googling Robert Kiyosaki and reading "Rich Dad Poor Dad" before taking this journey. He offers a number of free and paid seminars that teach people how to purchase real estate and make it pay. I have taken the free evening seminar and the $500 weekend seminar on how to purchase properties and make money with them. Note that I have no affiliation with Kiyosaki, and I do find his methods to work.

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