This & That: Watch Where You Take Advice Edition

H Wrote: I am trapped in the battle on weather I should pay off my debt (at a “low” interest rate of 6.5ish) or save for a down payment on my first house. I have been told my debt to income ratio and credit rating is good so that the only thing holding me back is that I am falling short on my down payment so that I should focus on that. The banks plan has me with my down payment within the year. Thoughts? Because seeing my debt not go down as much as it was is killing me!

Gail Says: Of course the bank wants you to focus on your downpayment. That means they can lend you money, all the while you’ll be paying interest on your debt. If you can’t afford to pay off your credit card now, how will you do so when you’ve taken on the added responsibilities and costs associated with home ownership. The bank is giving you very bad advice — which I’ve come to expect from banks these days. Pay off your consumer debt first. Then save for the downpayment.

 

C Wrote: $1800 penalty from Canada Revenue Agency for going over TFSA limit as advised by Scotiabank. I am Canadian but lived in France for several years before returning to Canada in early 2013. In April 2013, my advisor said I could put in $25000 in my TFSA as a Canadian. CRA says I was a non-resident and should have put in only $5,500. My penalty is $1800. Who is responsible, me or Scotiabank?

Gail Says: You should hold Scotiabank accountable for the bad advice. The tax man will only hold you accountable. Make a fuss. Make ’em cover your loss.

 

S Wrote: I have been struggling with this question and even my financial planner has been of little help. I am a pretty diligent saver, but am planning to actually spend a little bit of money now, and I can’t see my way through the smartest way to do this.

I am planning to make two significant expenditures: a new car, and a substantial renovation. I want to replace the car in the next few weeks, and the renovation would happen in 6 months.

I diligently max my RRSP contributions every year, pay my mortgage on an accelerated basis; have a regular savings plan and no other debt. There is $160K left on my mortgage, at 4% with 17 years amortization.

The car I am interested in would cost $45K cash, or approximately $600 per month to lease (I put on a lot of mileage, so that is a high-mileage lease).The renovation I am planning would be in the $100k range. I have been saving towards both and currently have allocated about $25,000 to the car, $25,000 to the renovation and have another $29,000 that could be allocated either way. I am planning to finance the remainder of the reno costs though my home equity line of credit, which I would convert to a mortgage at approx. 2.99%. The goal is to pay off both the original mortgage and the 2nd one in approx. 17 years.

I have been saving $500 towards the car, $500 towards the reno, and an additional $400 per month, so continuing to devote that amount to those goals will be feasible for my cash flow.

I always thought buying a car outright made more sense than leasing. That would be fine if it wasn’t for the renovation plan. If I devote $45k to the car, then I have to take on more debt for the renovation. And with compounding interest on a larger mortgage, the interest costs would be higher over the long run. If I lease the car, then the debt I am taking on for the reno would be lower… which means lower interest costs… but I will be devoting the equivalent of my current monthly “car” savings to a lease payment instead and won’t be able to save that towards the subsequent car or to paying off reno debt. On the other hand, if the mortgage is paid off many years sooner, then I can start devoting that “house” monthly budget back to savings (whether to finance more house stuff, or the next car) sooner. Then again, if I buy the car outright, I have some trade-in residual value…

So… in my circumstances, would it be financially smarter to lease or to buy the new car, while still being able to accomplish my renovation goals?

Gail Says: I’m very surprised your financial planner couldn’t give you some help with this. Hmmm.

You have clearly put a lot of thought into this question. The two things you haven’t told me is what the interest rate is on the lease and how far from retirement you are.

Interest is interest is interest regardless of how you “term” it and the cost of leasing needs to be part of the factor. (I’m not sure why you’ve chose “lease” versus “loan” because leasing is often more expensive, but if you don’t know the up/downsides go read this: http://gailvazoxlade.com/blog/?p=3207 . Unless you are writing off the lease for business purposes, it almost always pays to finance instead of leasing.)

Okay, so your quandary: pay more for the car and carry the mortgage longer or pay less for the car, financing more, and evening out on the mortgage, right?

Back to interest is interest is interest. The point is to get the interest gone as fast as possible while paying the least amount of interest possible. To that end if the car financing cost is higher than the mortgage cost then you’re smarter paying for the car with cash and financing the renovations and then putting all your extra cash (by my account that’s $1,400 a month) against the reno costs. Since you have $79,000 available in cash to work with, you can pay for the car outright and still have $34K to put towards the reno. That would mean you’re only financing $66,000 (you will stay on budget right?) It should take about 4.25 years to get the debt gone with a payment of $1,400 a month, and you’ll pay about $4,300 in interest over those 4.25 years. At that point, you can start saving for the next car.

 

M Wrote: My question pertains to mortgage and HELOC insurance.

When mortgaging our home and obtaining a line of credit, a family member persuaded us that insurance on each of these was absolutely necessary. So, on our mortgage we pay a monthly insurance premium of $101, plus a disability premium of $45 (times two), for a total of $191 in monthly insurance premiums for the mortgage. Similar on the line of credit, $27 monthly insurance premium, plus another $46 (times two) for disability, for a total of $119. That means that in total, we are paying out $310 in insurance premiums every month.

With the benefit of time, I am starting to second guess these expenses. Both my wife and I are federal government employees we have life insurance through work, which in the event of one of us passing away would pay out enough to cover our line of credit. We also each have an additional life insurance policy that we purchased when our kids were born. In each case, were one of us to pass, the life insurance policies would be enough to cover the mortgage, line of credit (and then some). Through our employer, we also pay mandatory disability insurance premiums, so in the event of one of us becoming disabled we still would receive 70% of our income.

So my question is; are we over-insured? I feel like it would be wiser to cancel the insurances we took out with the bank, and just use the extra money to spend frivolously (just kidding!). I would maintain my same payments, with the additional funds going against the capital instead of towards insurance.

Would that be wise?

Gail Says: Mortgage life insurance is one of the most expensive forms of insurance. It’s actually a complete rip-off. Since you know you have enough insurance, cancel the mortgage/disability life insurance. Create a new “savings” account and have that $310 a month automatically moved to your new high-interest (Achieva, Manulife, Tangerine) account. Each year use that money to make a principal prepayment against your mortgage. NOW that money is working for YOU.

 

C Wrote: I recently received an offer for a pre-approved credit increase on my credit card on which I am currently carrying a balance. I am making biweekly payments higher than the minimum and hoping to have it paid off by spring. I don’t think I need the credit increase but wonder if it would improve my score since currently I am fairly close to the limit. I had thought I would ask for a limit decrease as I pay off the card.

Gail Says: Don’t take the credit increase. Keep paying off the balance. Don’t reduce the limit as you go. Once it’s paid off, use the card for things like groceries and pay off in full each month. That’ll give you a good credit score.

 

N Wrote: I’ve always enjoyed your show and value your advice. I never thought I would end up in the financial position I am in. I’ve always been smart about my money, but last year things got really out of control. I thought purchasing high end goods would fill some hole that was missing in my life and it became a vicious circle. I am now sitting in $200,000 debt made possible with a secured line of credit. I know this is ridiculous and I am so ashamed of myself. I know I have to sell off all the things that I’ve bought over the year, but it will not be an easy task and I will end up losing about 50-75% of the retail value. I’ve also bought your budgeting files to really work on my spending habits and try to find any extra money to help pay this off. Should I be moving the line of credit into a flexible mortgage? Or any other advice would be appreciated.

Gail Says: One of the reasons I hate those lines of credit so much is because it is so easy to access them for no particularly good reason. I’m sorry you had one. I’m sorry you dug such a deep hole. I hope you tell your story over and over and over as a caution to other people who think it’s great to have easy access to credit just in case. You’ve got a long journey ahead and I wish you the best. Make a plan and stay focused.