Debt can sometimes seem like a weight that can never be lifted.
Pull the Reins on Your Other Debt Obligations
Your mortgage is not the only debt that may be weighing you down.
To illustrate, add up your total monthly interest payments, including credit cards, lines of credit, mortgages and car loans and consider what else you could be doing with that money.
Here are some tips to help you take control of your finances:
Pay down high-cost borrowings. Apply as much as you can to high-interest, unsecured and non-tax deductible debt first. This can help double up your mortgage payments. Use any source of extra cash. If you expect a tax refund, spend it on bills. If you expect a raise, don’t increase your standard of living, lower your debts. See if you can trim household spending and use the extra cash on your credit card bills.
Pay as you go. Use your credit card like a charge card. Pay it in full monthly. You can still maximize reward points while avoiding interest. Never pay one credit card with another. If you really need to reduce your debt load quickly, consult with your adviser to see if a low-rate line of credit would make sense.
Pay yourself first. Find an online bank with a good interest rate on savings and transfer money from your chequing account each time you get paid. Just $20 a week will give you $1,040 in a year, plus the interest.
If you are one of the Canadians whose debt-to-income ratio is too high, you may find that you are not able to keep up payments on your mortgage and other debts. If this is the case for you or someone you know, here are can help control mortgage debt:
1. Stress-test your budget: You must be able to afford your mortgage. Rule of thumb: Total housing costs, including mortgage, property taxes, and heating costs, should add up to no more than one-third of your household income. Test your budget using a mortgage payment based on a higher rate.
2. Carefully weigh fixed vs. variable-rate loans: Variable-rate mortgages are touted as a winning strategy over the long term because they generally cost less in interest and become even cheaper as rates fall. But in order to pay less than those with fixed-rate home loans, you take on the risk of escalating borrowing costs. Consider what would happen if payments doubled over the next few years as interest rates inevitably start to rise.
Fixed-rate mortgage payments, in contrast, are not affected by rate increases so you always know what you will pay over the term of the loan. Typically, you can switch to a fixed-rate from a variable-rate without penalty.
3. Make a larger down payment: Before taking out a mortgage, try to pay off short-term debt. Then put as much as possible up front on your mortgage.
The larger the down payment, the less interest you will pay over the life of the loan. Aim for at least a 20 per cent down payment to avoid having to buy default insurance.
4. Choose your amortization wisely: A longer amortization may mean lower mortgage payments, but it also means more interest. Be disciplined about paying down the mortgage as quickly as you can.
Try to refinance to a shorter amortization as soon as possible. The sooner you are mortgage-free, the quicker you can build your retirement savings.
5. Maximize your payments: Your lender will let you pay more than required to service your loan. The extra amount will vary by institution, with some even allowing you to double your scheduled payments.
In addition, consider taking advantage of prepayments when possible. The extra payments are applied directly to the principal of the mortgage, reducing the loan’s balance outstanding.
6. Use equity lines of credit cautiously: If the value of your home is higher than the amount you owe, you can apply for an equity line of credit, although the government will not insure it. These and other credit lines can be useful for financial emergencies, but they add to your debt burden.
If you take one out, be sure you have a plan to pay it down as quickly as possible. In the event of a short-term cash crunch, your lender may offer alternatives, such as withdrawing funds from your extra payments or skipping a mortgage installment.
Consult with your financial adviser, who can help you decide how much you can comfortably afford when buying a first home, trading up or looking to refinance. Your adviser can also help you to identify how borrowing strategies can play a role in achieving your financial goals and offer solutions that make sense in your situation.