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Death, Taxes, and Interest Payments: Part 2

There are some things in life you can’t avoid, but only two things you can’t avoid paying for: taxes and interest payments. In Part 1 of this series, we looked at owning a rental property as a great way to build your net worth while reducing your taxes. Now, in Part 2, we’ll be turning to interest payments. 

Interest payments are a pain to deal with but a necessary evil nonetheless. Here are a few ways to make them a little less painful. 

Consolidate Your Debts

Canadians were paying down their credit cards like crazy during the pandemic. It was an encouraging trend – but not one that was meant to last. As we head back into reality, so too are our personal finances: credit card spending was up 14.4% year-over-year at the end of 2021. Unfortunately, a lot of this debt is needless.

There is no reason to carry a credit card balance if you are eligible for a line of credit. Interest rates on credit cards can be as high as 22.99%, while unsecured lines of credit are Prime plus 3%. That’s around 7-8% today. In plain English, if you’re carrying $20,000 of debt on a credit card, that will cost you $4,000 annually. If you carry that same debt in a line of credit, that will cost you $1,400. The savings are unignorable.

Even better than consolidating in an unsecured line of credit is consolidating in a new mortgage. Yes, rates are creeping up – but a variable rate mortgage will always be the cheapest way to carry debt. Tying your debt into your mortgage could save you thousands annually.

Increase Your Mortgage Payments

I know what you’re thinking – telling someone to pay down more debt quicker seems obvious. If you could you would, right? What people often overlook is that paying down just a little more of your mortgage every year is actually fairly manageable. It’s also incredibly effective.

In fact, making an extra month’s worth of payments in a given year can help you pay off your mortgage in 20 years vs. 25 years. That’s 5 extra years of mortgage-free living you can add to your life. 

Choose the Right Mortgage Product

When people look for a mortgage, the first question they ask is usually “what’s the lowest interest rate?” It’s a good question, but it shouldn’t be the only question. What they should be asking is “which product will cost me the least amount of money in the long term?”

This isn’t just a question you should ask when shopping around for mortgage products. It’s a question you should continue to ask throughout your term. A mortgage needs to be evaluated and reevaluated regularly just like an investment. There are times where it might make sense to exit one mortgage product mid term, pay a penalty, and get into a lower cost product. However you decide to move forward, your strategy should always be to eliminate as much debt as possible as soon as possible. 

To achieve that strategy, make sure you look at the penalties when you lock into a new mortgage. The rate might be attractive, but the penalties could be 3, 6, 9, 12, or even 15 months worth of interest. Penalties like this could make the total cost of your loan way higher than a mortgage with a higher rate but better terms. 

You’ll also want to steer clear of “no frills” mortgages. These products are picking up steam, but they come with limited repayment options, higher than normal exit penalties, and some won’t even allow you to exit unless you sell your home. These products are proof of how important it is to look deeper than the interest rate.

Always Consult a Professional

Don’t get in your head about what you see on Twitter or what you hear about at parties. Comparing your situation to others’ will always do more harm than good. Mortgages are never apples to apples – so if you hear that your sister’s friend’s cousin’s boyfriend got an amazing rate, don’t be so quick to jump into the same product. Their circumstances may be different. Or maybe the market was different when they signed on. Or maybe their terms won’t be so great for them in the long run.

Stay away from the armchair experts. Think about what’s best for you now and for your future. Always talk to a professional before making any long term decisions that affect your financial health. 

Don’t Fall Into the 5-Year Fixed Rate Trap

In a recent blog post, I wrote about banks trying to lock people into 5-year fixed rate mortgages when they’re most vulnerable. This is a recurring theme over the last few years that has almost never paid off for customers. Fixed rates are way more profitable for the banks, so of course they’ll call and try to convince you that they have your best interest at heart. 

Everyone’s needs are different. Before you sign up for anything, make sure you’re looking at the big picture. Don’t take “advice” from people who work at the bank – the bank is just another corporation that is just trying to turn a profit. 

The Bottom Line

I started this series with a twist on a dark adage: “nothing in this life is certain except for death, taxes, and interest payments.” While I still believe that to be true, I also believe there are smart and simple things you can do to make them just a small part of your life. As always, if you have any questions, feel free to reach out.

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@canadamortgagenews.ca

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