Part 2 of 2…. In Part 1, we examined rental properties and how they can be a great way to reduce your taxes, build net worth and create an income stream. Part 2 looks at Interest payments. Interest payments are big part of our personal expenses. Here are few suggestions on how to reduce your interest costs.
INTEREST PAYMENT REDUCTION TIPS
It is estimated there is over $1.5trillion worth of personal debt outstanding in Canada. $1trillion of this is mortgage debt and $500billion is credit card and other debts. Interest rates can vary from 2.60% for a Variable rate mortgage to 20% for a credit card. Banks make an obscene amount of profit from these interest rates. Let’s reduce the amount we contribute to their coffers…
-consolidate your debts…. there is no reason to carry credit card balances if you qualify or have access to a line of credit… Interest rates for unsecured lines of credit are around Prime plus 3%… that’s 6% today. ($20,000 in credit cards could cost you around $4,000 in interest annually… a line of credit cost around $1,200 per year… a savings of $2,800 per year).
-consolidate your personal loans and unsecured lines of credit into a new mortgage or secured line of credit if you have the equity in your home. Residential mortgage rates charge the lowest rate of interest… Variable rate mortgages are around 2.60%. ($40,000 of loans and unsecured lines of credit could cost $$2,400 annually… a mortgage could cost you $1,040… a savings of $1,360 per year).
-increase your mortgage payments and pay your mortgage off sooner… making an extra month’s worth of payments annually, will help you pay the mortgage off in 20 years vs 25 years. Hey, rates have been extremely low for almost 4 years now… take advantage… pay that mortgage down.
-choose the right mortgage product. Fixed rate or Variable rate? Short term or Long term? The answer depends on personal circumstances, your needs, goals and the mortgage market. All too often, the first question borrowers ask is, “what is the interest rate?”. Good question, but they should probably be asking “which product will cost me the least amount of money to own my home?” This isn’t a one time question and answer. A mortgage needs to be evaluated regularly, just like an investment. There are times where it makes sense to exit one mortgage product, mid-term, pay a penalty, and get into a lower cost product. A mortgage requires planning and on-going review. The strategy should always be to eliminate this large debt as soon as possible.
- speaking of penalties, “what are the biggest costs associated with a mortgage?”. The answers are penalties, interest and being in the wrong mortgage product. A mortgage penalty can range from 3 months interest to 6, 9, 12 or ever 15 months worth of interest (yes, there have been several penalties charged to borrowers in the 10 to 15 month range by Canadian Banks). That’s why being in the wrong mortgage product can be costly.
- beware of ‘No-Frills’ mortgages. This is the latest thing to hit the mortgage industry. These products carry limited repayment options, carry higher than normal penalties to exit and some don’t allow you the exit unless you sell your home. You better know the penalties and limitations associated with that low-interest mortgage before signing into a contract…
- stay away from the water-cooler talk. It’s great to talk with friends and co-workers about mortgage rates and compare. This usually generates good questions. But don’t make any decisions before speaking with a professional. Your brother’s in-law’s cousin’s friend’s mother that works at the grocery store may have got a great mortgage rate or they locked into a great fixed rate when rates were going up…. but what are the details of that mortgage and the circumstances around that person’s decision? What are the terms that went with that mortgage? Don’t rely on water-cooler talk…. Speak with a professional that can review YOUR needs and give PERSONALIZED on-going advice for the next 15 to 17 years that it normally takes us to repay the mortgage. You’ll have a better chance of doing the right thing with your mortgage.
-who said to lock into a 5 year fixed rate? A lot of us were contacted by our bankers and told to lock into a 5 year fixed rate over the past few years…. clearly, that was not the best choice as Variable rates outperformed Fixed rates by as much as 3%….. Remember, the Banks would love to have all their clients in a 5 year fixed rate mortgage. This is their most profitable product. But this isn’t always the best choice for you. There is very little data to suggest that 5 year fixed has been the best mortgage term to choose. But perhaps we are in one of those rate times where 5 year fixed does make sense. Get a professional opinion and then decide…
-turn your bad debt into good debt. A couple were considering buying a new home and keeping their existing home. The existing home had little to no mortgage debt. The couple were going to finance the new purchase with a mortgage on that new house and rent the existing house. This is not a good strategy. A better option would be to refinance their current home, while they are still occupying it… thus reducing the amount of the mortgage they require on the new house. Then, once they buy a new home and rent the current home, they could deduct the interest cost against rental income…. minimizing their taxes.
The bottom line is that there are some things you can do to minimize taxes and interest costs…. and maybe by taking some action, we can also live a little longer by taking some stress out of our lives.
It’s December 2011, fixed mortgage rates are at historical lows…a 5 year fixed rate can be had for 3.39% and in some cases, even 3.29%. Does it make sense to refinance your mortgage and consolidate that car loan, student loan, credit card, line of credit or other debt? The answer is an overwhelming YES!
