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Posted Consumer Debt

How to get rid of Holiday bills and start building wealth.

debt amination Most Canadians suffer with their highest personal debt load in January, when the “holiday hit” arrives and your credit card statements let you know just how much you spent on the festive season. It’s especially hard if you already had a burgeoning debt load before the holidays.

This year, make the best New Year’s resolution ever: resolve to clear that debt, and start building wealth. Continue reading “How to get rid of Holiday bills and start building wealth.”

Posted Case study

Consolidate your debts and save money with today’s record low rates.

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!

Compounding interest rates are a killer.  If you have $20,000 or more in non-mortgaged debt, then you should consider consolidation.   Especially with today’s record low interest rates.

Here’s an example of one situation:

 Rate  Balance  Payment
 Mortgage 3.99% $300,000 $1,349
 Car loan 6.00% $24,000 $563
 Credit Cards 18% $10,000 $300
 Line of credit 7% $10,000 $300
mortgage penalty $2,993 $0
 Totals $346,993 $2,512

And here’s what the new situation could look like after consolidating their debts:

 Rate  Balance  Payment
 Mortgage 3.39% $346,993 $1,533
 Car loan $0 $0
 Credit Cards $0 $0
 Line of credit $0 $0
mortgage penalty $0 $0
 Totals 3.39 $346,993 $1,533

So in this example, we are reducing the monthly payment by $979.00.     Let’s take some of that money and put it towards your new mortgage… if you took $500/mth and put this towards your mortgage for 5 years, you would reduce your amortization to 10 years and 7 months.   Clearly, this is worth breaking the mortgage and paying the penalty.

(keep in mind, the penalty could be higher if the lender uses an Interest Rate Differential to calculate the penalty… Always speak with your Mortgage Broker to ensure the penalty is accurate).

 

 

Posted Case study

Listen to the Professor about how to save money.

Professor Moshe Milevsky is regarded as one of Canada’s leading Financial Experts… He’s written several books on building and preserving your wealth.  He’s also done several studies on debt and mortgages.   (make sure to visit his site here)

One of my favorites, and one of his best case studies, called “Why these eggs belong in one basket”, was about a strange phenomenon that seemed unique to Canadians.   We seem to take the rule of diversification and apply it to our debts.   We would rather have a mortgage, a credit card, a car loan, a line of credit, etc…when we should really be looking at consolidating these debts into the lowest possible interest rate.

He concluded that a typical family with $95,000 in total debts, with $2,700 in the bank, is losing about $1,000 per year by diversifying their debts instead of consolidating.   Now apply that to your own situation…. maybe your debts total $300,000 or more, how much are you losing per year?  $3,000, $4,000 per year or more?

I have my own opinion on why, we Canadians, do this… it must have something to do with our being so conservative….  Our parents taught us to pay off our mortgage first… get rid of that mortgage…. This is good advice… but somehow we thought it was okay to buy that car with a loan or a lease.. after all, everyone finances their car, right?   And then there’s the Home Shows on TV… ah yes… We must have the latest in home decor…etc.. you get the picture…Symptoms of the ‘must have now’ generation (a subject for another day).

The Federal Govt thinks Personal Debt levels will go down if we change Mortgage Rules….  By making it harder to get a mortgage, we will slow personal spending habits… My advice is to listen to the Professor…  Take your debt, roll it into your mortgage, pay less interest and save money… It’s really that simple…

Should we encourage home ownership or renting?

I found this article about the effects of making it harder to buy a house….. Here’s one of the statements that got me thinking..  “Rather than buy a home for half a million, many are moving out of the community to rent, or living rent free with their parents and buying all this junk.” I wonder how true this is.   I must admit, I know several people that are living at home in their 30’s, 40’s and even longer…. They don’t seem motivated to buy a house.

Final message is that Debt Consolidation is not a dirty word.   It’s good money management.

Posted 1 Comment on Debt consolidation… it’s not a dirty word Consumer Debt

Debt consolidation… it’s not a dirty word

What’s the first thing you think of when someone says ‘debt consolidation’?  Trouble… or, you can’t pay your bills…cashflow problems… We probably all think there is some financial problem..

Sure, that’s the popular reaction…and who can blame us for thinking that way with the recent media hype about Personal Debt concerns…  One day we have an article saying that Personal Debt levels are high or increasing… The next day, Canadians are conservative and managing our debts well.  This flip-flop would confuse anyone.  click here for some articles from earlier this year.

But debt consolidation can actually be a good thing most of the time…  And that time is now.  You’ve heard of ‘buy low and sell high’… Well in credit, you ‘borrower when rates are low to save high amounts of money’…

With record low interest rates it makes sense to borrow….If you own a home, have some equity and have some non-mortgage debt, such as credit cards, a car loan, a student loan, a line of credit, etc…  These debts probably carry a higher rate of interest than what you could get through a mortgage…  Debt Consolidation is a smart thing….paying less interest puts money in your pocket.

Here’s a good calculator to figure out how much you can save…DEBT CONSOLIDATION CALCULATOR.

Use these rates for comparison…Mortgage rates are well under 4.00% today… a 5 year fixed rate is somewhere around 3.59% and Variable rates are around 2.25%…  compare this with 12% to 18% credit cards, 6% lines of credit, 7% car loans, etc… Rolling these debts into a mortgage is not a bad thing, it’s a smart thing.   Paying less interest just makes good financial sense.

And as always, speak with someone who knows and understand financial matters… talk with a qualified Mortgage Broker or Financial Planner….

Posted Consumer Debt

These Eggs do belong in one basket

Our parents taught us to pay our mortgage off quickly… Great advice, but they forgot to tell us to not incur other debt while we were paying that mortgage off….

A few years back, there was a study done about Debt Diversification by Moshe Milvesky, Associate Professor of Finance at Schulich School of Business Milevsky debt review.   The study showed that we were using the old rule of ‘Don’t put all your Eggs in One Basket’ and applying that to our debts.   And this is exactly what you should NOT be doing…

Investment diversification is GOOD, Debt diversification is BAD.   The study used $95,000 as a typical amount of diversified debt and $2,700 in idle cash…. the conclusion is that this combination results in a $1,000 loss per year by not managing debts properly.

If you have equity in your home and you carry a balance on your credit card, line of credit, or have a car loan or student loan, then you should consider utilizing the equity to borrow at the lowest rates possible… Residential Mortgages are always the cheapest form of financing…