As we look back at 2020, we are inclined to see ourselves as survivors of a year like no other. Sometimes when we view life through that lens we fail to identify opportunities that present themselves. One thing that 2020 did was to lower interest rates. This is a perfect opportunity to take a step back and look at ways that you may benefit from these lower rates.
For those with credit card and other debt with high interest rates, they may be able to transfer this debt to a Line of Credit (LOC) or add it to an existing mortgage to reduce costs. If you have an LOC, you can look at transferring that debt to your mortgage to lower interest changes.
Should you have a mortgage and your term is not up for renewal, you should look at breaking the term and paying a penalty. In many cases you can save substantial interest. Rates change daily but at the time of writing, 5 year terms can be had for under 1.7% from many lenders.
By taking a big picture approach to your debt, you can find that not only do you lower your costs and save significantly, you can lock in the ultra-low rates for longer. There is no guarantee that these rates will be available when your term expires. A lot can change in a year, two or three.
When you incorporate this discussion as part of your overall financial plan, you can reallocate the savings to work for you. For example, restructuring your debt might free up $1,000.00 or more monthly. That money can be used to pay off your mortgage sooner or re-invest in further savings. As an example, you could apply the savings directly to your RRSP. That way, you save taxes and enhance your income in retirement. All of this can be accomplished without spending an additional penny.
An example could look something like this:
Family of three – both parents working with a 4 year old son
Current debt (mortgage, line of credit, credit cards, etc.) – $3,500.00 monthly
RRSP – $500.00 monthly
RESP – $208.33 monthly (based on yearly maximum allowed of $2,500.00 to ensure CESG)
TFSA – 0 monthly
New mortgage (with no other debts and same amortization) – $2,411.00
RRSP – $1,797.33 monthly
RESP – 0 monthly
TFSA – 0 monthly
Increased tax refund based on $1,297.33 x 12 months = $15,567.96 x 40% tax refund = $6, 227.18. If you take the additional tax refund and allocate $2,500.00 to the RESP, it will generate an additional $500.00 in CESG. By doing this, you would effectively be letting the government pay for the education plan for your child. You could then use the remaining $3,727.18 to contribute to your TFSA that can be used for an emergency fund.
This is just one example of the benefits of reviewing your debts and what you might be able to do with the savings. While every situation is different and unique, we can identify solutions that will work for you and your circumstances.
What’s really important is that this type of discussion should be part of your regular annual review with your Financial Advisor. If it isn’t, you are likely not getting what you are paying for from your advisor.
If you would like more info, we are just a call or email away and we would be glad to hear from you.