How to Deal with Debts Amidst Rising Costs

Live community it’s Wednesday with the financial confidante Jackie Porter.

We have been financing debt in single digit rates for more than 10 years.  What can be challenging about low-interest rates as an advisor is people begin to take it for granted and believe rates will always stay this way.  Now that rates have crept up so quickly some people are scratching their heads and no longer feel they have a sustainable plan in place to pay off debt.  Well live community, all is not lost. Today we are going to discuss practical strategies to help you pay off debt sooner and manage the debts you have.  This is an important conversation because I have noticed several clients across the board are tackling debt (no matter their income) you may have heard me talk about the broke millionaire before.

Let’s start with one of the largest debts you will take on over the course of your life – Your mortgage.

Quick question: How many of you have your mortgage coming up this year?

If you have a mortgage coming up, you may be experiencing shock about the new rates and payments. Here are 5 options I recommend for the mortgage rate to be more affordable:

Tip Number 1: Negotiate vigorously with your current bank to get the most competitive rate. Obviously, variable will be lower than fixed but no one knows for how long.  My sense is we may now be going into a higher interest rate time so not sure if we need to change our expectations on what it will cost to finance stuff like our mortgage, if that’s the case you may want to have a variable that you convert to fixed at some point in the future. The key thing is to manage our expectations and prepare for interest rates to go higher.

Tip Number 2:  Speak to a mortgage broker instead of renewing with your current bank. That way you can shop around for you to obtain the lowest rates, so you have more than just your current bank competing for your mortgage business.  A mortgage broker can also offer guidance on competitive products in the marketplace that can offer more flexibility than your current mortgage.  For example, there are products out there that will allow you to fix your mortgage payment so you know what you will need to pay even if the rates continue to go up. This added peace of mind can make all the difference when inflation is causing other expenses to go up just as quickly and you want some predictability on what your payments will be. Remember you always have options.

Tip number 3: If you simply don’t want to ride the wave of your payments going up, shopping around with a mortgage broker for a fixed rate makes even more sense.  Pay the lowest rate you can find for a fixed term such as a 5-year rate. Speaking of fixed and variable what’s your preference? Fixed or variable? Please share your preference with us in the comment below.

Tip number 4:  if you are concerned with the rising cost the mortgage on top of your other expenses, you may want to try this strategy. Speak to your broker to increase your amortization period.  What this means is, if you were scheduled to pay off the mortgage in 15 years it may now take you 20 years but increasing the payments can make the mortgage more affordable and closer to the payments you were making before your term renewed.   For individuals who want to pay off the mortgage sooner, the strategy works the other way as well. If you want to pay less interest, shorten your amortization from 15 to 10 years so you can reduce the interest you were expecting to pay and you have the cashflow to do it.

Tip number 5: For those of you who have high-interest debt that has been harder to carry now that rates have gone up, consider refinancing your debts in the mortgage and work with your lender to set payments at a monthly amount closer to what your cash flow can support. Before getting to this point, it is important to check and maintain a good credit score. To negotiate with the bank, you need to have a score of at least 650 to be considered for slightly lower rates. There are a couple of websites like Credit karma, Equifax e.t.c  that lets you get your credit score and monthly reports for free.

Remember as interest rates rise, focus on reducing your expenses as much as possible even if it means stretching yourself so you can still finance things like your retirement and emergency fund.  Reach out to us for a complimentary 30 min strategy session, email info@askjackie.ca  to create a plan that allows you to pay off debts sooner and balance this with investing in your future. Thanks for reading the conversation and remember to follow us for all the latest updates!