Use your mortgage to pull debt together and save for retirement.

Perhaps too much debt has made your monthly cash flow tight, putting you under some financial pressure and making it almost impossible to save for retirement. With the right plan in place, it may be possible to simplify your debt, reduce interest costs, and save for retirement, all without earning more or cutting your spending. 

If you have enough equity in your home (you can’t refinance a mortgage above an 80 per cent loan to value), we can show you how to use that equity to roll your high-interest debt into a low-rate mortgage and make a large RRSP contribution if you have contribution room.

Here’s an example – mortgage, car loan and credit cards total $225,000. If you have enough equity, you can roll that debt into a new $233,000 mortgage, including a fee to break the existing mortgage, and look at the payoff.

Current                              NEW

Today               Monthly Payments*              Monthly Payment*

Mortgage                                          $175,000                              $969                                      $1,038

Car loan                                            $ 25,000                               $495                                       $ 0

All credit cards                                  $ 25,000                               $655                                       $ 0

Total                                                                                             $2,119                                    $1,038

Add $25,000 RRSP Contribution ($258,000 mortgage)                                                            $1,266

*4.5% current mortgage, 2.45% new mortgage, 25 year am. Credit cards 19.5% and car loan 7%, both at 5 year am. OAC. Subject to change. For illustration purposes only.

By pulling debt together into a low-rate mortgage, your monthly debt payment is $1,081 less each month– a great improvement in cash flow! If $500 of that extra cash flow is put back into your mortgage, your mortgage amortization is reduced from 25 years to 15.

If a $25,000 RRSP contribution is also made (assuming you have contribution room), the monthly payment is still reduced by a large amount – $1,081 per month. Assuming a 40% marginal tax bracket, there may be a tax refund of $10,000 from the RRSP contribution. If that refund and $500 of the extra cash flow each month is put into the mortgage, the $25,000 RRSP amount added to the mortgage is paid off in approximately 2.3 years.

For some homeowners, this is a great way to save more and pay less! Not only can you make your monthly debt payment smaller and save on interest, you also save for retirement—all in one!  Manage your debt, save more for retirement, and enjoy a new financial life. I’d love to help you crunch some numbers and assess your situation.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca