How Canadian Homeowners Can Pay Off Unmanageable Debt Interest-Free

Falling behind on bills and accumulating debt is incredibly stressful. For some Canadian homeowners, higher mortgage and other debt payments have stretched their monthly budgets to the breaking point. Higher unemployment and tariff-related price increases have only added to the pain.

Almost 15% of Ontarians filing for insolvency in August were homeowners, according to a monthly index by licensed insolvency trustee firm Hoyes Michalos.¹ That share had been slowly ticking up since 2023, and picked up speed in the past nine months.

If you’re a homeowner dealing with more debt than you can manage, you do have options for paying it off and returning to financial stability.

Canadian Homeowners Face Rising Debt Levels

Canadians’ total consumer debt reached a record $2.6 trillion in the second half of this year, driven largely by existing borrowers taking on more debt to manage daily expenses.² More Canadians, particularly in Ontario, also fell “seriously behind” on debt payments year-over-year.

Indicators of rising debt stress have been concentrated in some of the country’s most expensive housing markets, where homeowners with large mortgages are more vulnerable to the shock of higher payments elsewhere. And when homeowners do file for bankruptcy, it’s typically because of those unsecured debts, rather than being delinquent on mortgage payments. On average, Ontario homeowners who file for insolvency owe about $112,000 in unsecured debt such as credit cards, personal loans, payday loans and income tax debt. Levels of unsecured debt among insolvent homeowners increased about 13% year-over-year.³

Debt Repayment with Home Equity

It’s natural to think of tapping into the equity in your home to consolidate and pay off high-interest debt. However, the traditional options do come with some trade-offs to consider.

• Refinancing your mortgage: Renegotiating the terms of your mortgage allows you to consolidate debt by borrowing up to 80% of the equity in your home. But this option could increase your monthly mortgage payments, and can come with a prepayment charge, increase the amount owing on your mortgage and lengthen the time it takes to pay off your home. Refinancing may not be available to some homeowners who bought at the top of the market and whose equity was reduced by falling home prices.⁴

• Consolidating with a home equity line of credit: This option lowers the interest rate you’re paying on unsecured debt, and can give you more time to pay off debt, as you’re only required to make interest payments during the HELOC’s draw period. But your debt will continue to accrue interest. Your monthly payments can also spike if interest rates rise, risking the stability of your budget. If you don’t already have a HELOC with your lender, they may decline to extend one based on your credit score or debt-to-income ratio, or if you don’t have enough equity in your home.

• Second mortgage: If you’re unable to refinance, you may be able to use your home’s equity to take out a second mortgage. However, interest rates are much higher on second mortgages (typically in the realm of 8 to 15%), and carrying two mortgages means managing a lot of fixed costs. Your credit score, debt-to-income ratio and income affect whether you’d qualify for one.

How to Pay Down Debt Without Interest

If you’re already facing financial challenges, it’s understandable to not want to solve it with another form of debt or by stacking on another monthly payment.There are two options that allow you to tackle unsustainable debt and improve your financial picture without having to worry about compounding interest.

What is a Consumer Proposal?

In Canada, a consumer proposal is a legally binding agreement between you and your creditors to repay part of what you owe, with no interest. After you repay that amount, your debt is fully forgiven. These agreements are arranged, filed and administered by a licensed insolvency trustee. Once you file, you’re protected from collections calls, wage garnishments and lawsuits from your creditors.

Your trustee will negotiate with your creditors on your behalf to determine the amount you repay, which is based on a combination of what you can afford and what your creditors will accept. Typically, that could be in the range of 30 to 70% of the total unsecured debt you owe. Your creditors are not required to accept a proposal but, if they agree, you would make monthly payments toward the negotiated amount, which can be spread over a period of up to five years.

Your home equity will factor into the amount that your creditors will agree to. If the value of your home equity is higher than your total unsecured debt, your creditors may require a 100% consumer proposal — meaning you pay back the full amount.

A consumer proposal does impact your credit score, though it’s less severe than filing for bankruptcy. Additionally, consumer proposals remain on your credit history for six years after you file or three years after you complete them, whichever is sooner. A lower credit score can impact your ability to get credit from lenders in the future.

What is a Home Equity Sharing Agreement?

A Home Equity Sharing Agreement (HESA) is another way for homeowners in the Greater Toronto Area⁵ to access home equity to pay off debt — crucially, without having to worry about interest or monthly payments. There is also no impact to your credit score.

Under a HESA with Clay Financial, you receive a lump sum of up to 17.5% of your home’s value, tax-free.⁶ You can put the money toward immediately paying off your debt, and any remaining funds are yours to use however you choose, such as to be set aside in a high-interest savings account as an emergency fund. 

Because a HESA is a financial contract, not a loan, we’re able to be more flexible in our underwriting process. We focus more on the equity you’ve built in your home and less on the unsecured debt you’re managing. We’ll need to see that you have a plan to cover your homeownership expenses, including your mortgage payments, basic maintenance costs and property taxes, but we’re able to consider this without setting inflexible income requirements that are common to loan applications. This can be a helpful option for homeowners who need to pay off their debt but are otherwise well-positioned to manage day-to-day expenses afterward.

At the end of the term you make a payment of the original lump sum plus our share of the appreciation of your home (or minus, if the value of your home decreases).⁷ Our contracts are flexible, ending either when you sell your home, buy us out of the agreement (any time after year five), pass away, or after 25 years.

When to Consider a Consumer Proposal 

You should consult a Licensed Insolvency Trustee (LIT) to determine whether a consumer proposal is right for your specific situation. But according to debt management experts, mortgage brokers and LITs across Canada,⁸ a consumer proposal may be appropriate when: 

• You cannot pay the full amount of debt you owe.
• You have little or no equity in your home.
• You don’t qualify for refinancing, a HELOC or second mortgage, or those options would further strain your monthly budget.
• You don’t mind taking the temporary hit to your credit.
• Your total unsecured debts are less than $250,000, the maximum eligible amount for qualifying for a consumer proposal.

When to Consider a Home Equity Sharing Agreement

A HESA might be the right fit for helping you eliminate unsustainable debt if:

• You have at least 25% equity in your home.
• You have enough equity to pay off all your unsecured debt.
• You’re confident that you’ll be able to manage your day-to-day expenses and mortgage payments after your debt is paid off.
• You want to avoid the credit impact of a consumer proposal.

Get a Fresh Start From Debt

Being able to pay off your debt without having to worry about ongoing interest payments is a significant weight off your shoulders. Whichever option is right for you, you’ll have the breathing room to start to rebuild your financial foundation.

If you want to learn more about how a HESA from Clay Financial could help you eliminate your debt, get a free, no-obligation estimate today. 

1. See the index here. The monthly study is based on Ontarians who work with the firm to file for bankruptcy or a consumer proposal. ↩︎
2. According to data from both Equifax and TransUnion. ↩︎
3. According to the Hoyes Michalos Bankruptcy Index. ↩︎
4. The Bank of Canada’s latest Financial Stability Report estimated nearly 10% of Toronto-area borrowers renewing in 2027 could be unable to refinance their mortgage. ↩︎
5. Clay Financial’s HESA is currently available in Toronto, Mississauga, Brampton, Hamilton, Markham, Vaughan, Oakville, Richmond Hill, Burlington, Oshawa, Whitby, Milton, Ajax, Pickering, Newmarket, Aurora, Whitchurch-Stouffville, King and Uxbridge. ↩︎
6. Up to a maximum of $500,000. You must have at least 25% equity in your home to access a HESA. ↩︎
7. We share in the depreciation of your home if you sell your home anytime after the initial five years of our agreement. Learn more on our website. ↩︎
8. This list of factors is based on commentary from LIT Hoyes Michalos, the Credit Counselling Society, Consolidated Credit Canada and Vancouver mortgage broker Vanna King. ↩︎