Cut Your Debt – A Smart Refinance – Canadian Mortgage Scenario
This is a story about a couple who made a really sound financial move a few years ago. For confidentiality, I’m going to call them Wilma and Fred Flintstone.
Here are two reasons to read this story and consider whether this strategy could help you.
Canadian mortgage rates are near all-time lows.
Rumours of Less Competitive Renewal Rates in the future: With deteriorating credit and/or falling home values nationwide, clients may be offered higher rates than usual as lenders prepare for potential coming losses.
Ok, here’s the scenario. Wilma and Fred are the owners of a modest, well appointed home in West Kelowna and this home has appreciated since they purchased in 2015. Both have decent incomes, one employed and the other business for self. Their two children are both pre-school age and they spend a lot of family time adventuring through the Okanagan Valley and visiting with family who inevitably come to visit from the cold Prairies.
Despite living a relatively modest lifestyle, costs of living and children are high and maternity leaves for the self-employed are not free so Wilma and Fred found themselves with an accumulation of unwanted debt that they were struggling to get out of.
High interest debt vehicles like credit cards and even unsecured lines of credit are hard to pay off.
The high interest from this debt keeps compounding and the bills keep coming in.
Did you know that when a lender does analysis on you (or analysis on a country or corporation for that matter), they seek to calculate the maximum level of monthly debt payment a client can support. Lenders want the client to be able to keep making (at least) minimum payments but never actually be able to pay off the debt.
Lenders love cashflow. They love YOUR monthly cashflow. Debt is designed to harness this flow towards perpetual payment of monthly interest costs.
Here’s a way out of monthly debt servitude.
Wilma and Fred made a great financial decision in 2017. They refinanced their home at a 2.89%, 5-year fixed mortgage to access just enough money to pay off the consumer debt fully and build a backyard deck area. Since this refinance, they have improved their property and kept the credit card and line of credit debt at $0, paying off all amounts each month. In addition, the monthly savings from not having to pay such high interest payments has been redirected into a monthly TFSA savings plan.
If you want to tackle your debt now or perhaps access some money for investing or a second property, now may be the time to give me a call.
Rates are falling and economic indicators show that they may drop again soon.
Why do I think mortgage rates will drop further?
Historically, 5-year mortgage rates follow the trend of 5-year Canadian Bonds. Wherever the 5-year Canadian Bond yield is at, 5-year mortgage rates will be between 100 and 200 bps higher. Most typically 150 points higher.
Today the 5-year Canadian Bond yield is at 0.36% so the 5-year mortgage rate should be between 1.36% and 2.36%.
CUT YOUR DEBT STRATEGY
Let’s use a rate of 2.36% as an example showing how much you could save monthly on interest by consolidating high interest debt into your mortgage.
$50,000 credit card debt at 19.99% consolidated into a mortgage refinance at 2.36%
$832.92 vs $98.75
MONTHLY SAVINGS of $734.17
$50,000 unsecured line of credit debt at 6.5% consolidated into a mortgage refinance at 2.36%
$270.83 vs. $98.75
MONTHLY SAVINGS of $172.08
If you have equity in your home and are working through this COVID-19 crisis, contact me to see how much I could save you monthly. A smart refinance today will lower your interest costs massively, provide a plan to keep consumer debt at $0 and possibly building a savings plan with the additional money left over at month’s end.
One of my hobbies is blogging about mortgages, debt and government policy. During the day I’m a MORTGAGE BROKER in Kelowna, BC!
PS – I’m always available if you have any mortgage related questions. Contact me HERE.
If you’d like some handy tips on how to save money when you buy your next house, Check out the free Huber Mortgage Home Buyers Guide HERE