Mortgage Blog

Boom or Bust – It Pays to Pay Attention to Your Debt

March 21, 2016 | Posted by: Kelleway Mortgage Architects

Have you seen this bumper sticker recently?

The bumper sticker may be an urban myth but that saying has been around the oil industry since the 1980s and now it’s back again.  Boom and bust economic cycles are not uncommon across Canada and they’ve hit several industries in the past; namely oil & gas, forestry, real estate and tech.

The 20/20 hindsight advice is to make as much income as you can, live below your means and save for the future because the future is always uncertain.  Also, aim to get ahead on paying down your personal debt including your mortgage balance by paying more than your regular payment and/or making an annual lump sum payment.   (Contact me)

It’s easy to get caught up in spending sprees and high debt when times are good.  I’ve likened this to speeding down the highway. 

Everyone does it and you’re just keeping up with the traffic flow.  But, the few out there who are driving a little slower and leaving more of a gap between vehicles, do not need to adjust as much to avoid a crash.  When bad weather hits, they have more time to ease off the gas pedal (i.e., prepare), brake and swerve out of harm’s way.

If you have a high debt load in good economic times, the academic advice is to pay off your high interest debt first by using a debt snowball calculator.   While meeting your minimum payments on all your debt balances, focus on paying off one debt first.  Perhaps start with the lowest balance so you feel you are achieving your debt-free objective quickly (see US money coaching site and a free Excel snowball calculator).

Or, you could list your debts from highest interest to lowest interest charged and pay them in that order to save the most on interest fees.  Building like a snowball, use the freed-up payment from the first debt to pay down the next debt - then combine those freed-up payments and continue the process on the third debt, and so on until all your debts are paid.  (Contact me)

Another strategy is to refinance, consolidate your debt and pay it off at a lower interest rate.  Most importantly, the habit of accumulating debt to purchase “stuff” and “experiences” has to change to a habit where you become addicted to saving and accumulating assets – especially income generating ones.

When the economy enters a bust cycle, I start hearing from clients who ask me:

- Can I get a home equity loan?
- Can I reduce my interest payments?
- Can I lower my interest rate?
- Should I be paying more on my mortgage or paying down my other personal debts?

If my clients’ future source of income is uncertain, I recommend they ease off paying down debt and just make minimum payments until they have saved enough cash to cover at least two months worth of living expenses.  Think of this as your airbag, hopefully you will never have to use it but it is reassuring to know there is a cushion if you have an accident.

Once you have banked enough savings to cover two months of living expenses and you are still concerned about future income, you’re ready to take the next step.  For the next few years, work on “over paying” your mortgage.   By accumulating a few extra monthly payments that can act like  “side airbags” to slow the impact of being financially blind-sided by some life event.    (Contact me)

There is a variety of ways to pay down your mortgage faster depending upon the terms of your current mortgage contract with your lender.  For example:

1) Are you allowed to pay via accelerated bi-weekly payments?  If so, that may mean paying 13 months per year rather than just 12.  The result is that you keep chipping away at your outstanding balance more frequently and it gets paid off faster because you are saving on interest.

2) Are you allowed to pay a 10% or 20% lump sum payment once per year?

3) Are you allowed you to increase your regular payment up to 20%?

4) When does it make sense for you to refinance and consolidate your debt?

Any of the above strategies could save $100’s, maybe even $1000’s, of dollars in interest as you pay down your mortgage and other personal debt.  To find out what’s best for you, start by sending us your annual mortgage statement (they usually arrive by mail in February) and let us take a look.

Call us also to determine what speed of mortgage payment is best for you and then you can set a course.  With a cash reserve on hand and extra payments on your mortgage, you will be better prepared for life events that may affect your personal finances.  For example:

1)   job layoffs or income instability or a career change (perhaps look at ways to slow down debt repayment and breathe easier?)

2)  receipt of intermittent or unexpected income from work bonuses, inheritance, tax refunds, investment income, etc. (is it time to “overpay” your mortgage or pay down debt?)

3)  parental or maternity leave and childcare expenses (steady as she goes or slow down debt repayment?)

4)  reduced income due to medical or disability leave (slow down repayment, sell or refinance?)

5)  property repairs, upgrades or renovations (refinance?)

6)  relocating (time to sell, port your mortgage, or finance more than one property?)

7)  taking some personal time for an extended trip, skills upgrade, professional development or care for family members in need (steady as she goes or slow down debt repayment?)

8)  income increases due to new employment or business-for-self income, work promotions or additional household income from a partner or spouse (is it time to “overpay” your mortgage or pay down debt?)

9)  preparing for or entering retirement, or caring for seniors (all depends upon your individual situation, doesn’t it?)

10)  changes to marital status involving all types of relationships and their beginnings and endings  such as common law, marriage, separation, divorce, re-marriage, widowhood and child custody (what are your options?)   (Contact me)

If times get really financially tight, there are also many ways to manage a mortgage before payments are missed or the mortgage slides into default.  If you are worried, then the sooner you talk to us so that we can talk to your lender, the more options you will have to make your situation better!

All of the above can be a bit confusing and overwhelming to manage and decide on your own.  That’s why engaging a trusted mortgage broker in your mortgage and debt conversations can be your best move.  By doing the numbers for you, we at Kelleway Mortgage Architects can bring you peace of mind when making the right choices for you and your household!


What's the Next Step for You?

1)    Keep us in mind and on hand in case anyone you know runs into the same sort of situaltion.
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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner

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