This & That: Mish Mash Edition

S Wrote: In speaking with my mortgage broker this week, she suggested that I roll my LOC debt into my mortgage when it comes time for renewal (next year). The LOC (racked up paying my family lawyer), is at about $40K. The mortgage will be at about $190K when I renew. Unless the ex decides to take me to court again, which is entirely possible, I don’t anticipate dipping into the LOC as I have my budget fully under control. I’m chipping away at my debts and building an Emergency Fund slowly but surely. The problem is that I am making lower payments than I’d like to be making on this LOC debt (interest +$100 per month), because I am also paying off my student loan (about $5000 left) and a car loan ($12,000). However, the student and car loans will be done with a few months before I renew my mortgage and I will be able to snowball that money ($238 + 572) into the LOC payments, bringing them up to about $1100. Still, with the LOC barely moving right now it will still be very high when I have to renew my mortgage. So my question is, is it advisable to put the LOC into my mortgage? At this rate I won’t be debt free in three years from today, but once my student loan and car loan are gone, I will be able to pay the LOC in three years. So won’t I end up paying much more interest on the LOC in the long run if I put it into my mortgage? I wasn’t sure if my broker was saying that I should do this to eliminate the LOC payment, or if she was saying I have to do this because nobody will renew my mortgage with such a big debt on my credit bureau report. I know sometimes you advise this sort of refinancing but I’m confused as to whether it is advisable in this situation. What are your thoughts?

Gail Says: Your mortgage should carry a lower interest rate than the LOC, leaving more of your payment to go to the principal. So as long as you commit to following through with rolling the car and student loan payment money towards your mortgage, consolidation makes sense. Don’t raise your mortgage payment amount beyond the normal calculation; instead make sure you have a good prepayment option and stick the money into the mortgage that way so you don’t strap your cash flow too tight.

 

S Wrote: I followed a tip from your Money Rules book and sought out a free credit rating report from Equifax. However, they are refusing to process my request until I provide a copy of my SIN #. I checked with my local Service Canada office, which issues these numbers and they advised me not to provide a SIN number for a credit check. They provided me with a written statement of when a SIN # should be released (employment, mortgage etc), and I forwarded this onto Equifax, but they are still refusing to complete the credit check.

So, I’m at an impasse. What to do? Should I give out my SIN #, which I guard obsessively to minimize the risk of identity theft? Or, just give up as I know I have excellent credit?

Gail Says: The credit bureau wants your SIN to ensure that you are YOU. They need as much identifying criteria as they can get to make sure they don’t mess up and mix you up with someone else. It’s fine for Service Canada to say not to give them your SIN, but then you won’t get a copy of your credit report. You have to decide if you trust the credit bureau enough to provide this information or are prepared to not get your credit bureau report.

 

J Wrote: I have three credit cards. I’ve had two for almost a decade, and I got the third less than 2 years ago when Target opened in Canada to take advantage of the discount that came with it. I pay the cards off in full when I use them. However, I don’t need this third card now that Target is leaving Canada. There’s no monthly fee associated with the card, but I’m wondering should I cancel it anyway? Will my credit score be affected if I do?

Gail Says: You’ll likely take a small down-tick on your score for cancelling the card, but do you really care? If you’re not carrying balances, you’re not paying interest. And if you’re not applying for credit anytime soon, the score will correct itself in a couple or three months.

 

G Wrote: Why do you reward people who have gotten themselves into debt? I think people who do not get themselves into debt in first place should be rewarded. I could use $5000.00 for not getting myself into debt in the first place.

Gail Says: And the premise of your TV show would be what? Look at this interesting guy who lives within his means. You do realize that the network has the say as to what shows get made and what shows don’t, right?

 

L Wrote: I am 65, working, and collecting CPP and Old Age in order to pay lawyers for a seemingly never ending divorce. I have few savings due to this and have had conflicting advice on RRSP vs TFSA. Would I be better to take money out of my TFSA and put into my RRSP for the upcoming tax period or just leave the TFSA and try to put more money there? I have not been contributing to RRSP’s for the past 3 years as any extra money needed to be allotted to my lawyer. I have only been collecting CPP & OA since November and have a small amount of debt I have been paying off with it, but need to be sure I am getting the most value I can so I can hopefully look forward to retirement without worry within the next few years. You have been a huge inspiration to me since leaving a relationship full of debt and a spouse that refused to acknowledge the problem.

Gail Says: Unless you are in a high tax bracket where the RSP contribution will save you a whack of tax (which you can then plow back into the TFSA) I would simply put any extra money into the TFSA. Once the debt is paid off, put as much of those government benefits away as possible for the future.

 

D Wrote: I thought I was a financial guru, until now. I read the books, watched your show, minimized my expenses and still managed to drop the ball. I had a small Emergency Fund and used it very quick. I have been putting everything I could towards my mortgage. I have $69,000 in available funds that I could borrow from but it would be slowing me down from my goal to pay it completely. I had taken a 3 year term at a rate of 2.78 per cent and said to myself and my wife, the bank didn’t want to give us as good a rate for a 5 year term, we will pay it off in 3. So far so good, I am 18 months away from my goal but didn’t have enough of an emergency fund to get by with my wife losing her job. Actually my mortgage is up February 2017 but my pace to pay it is August 2016. It is wrong to use my mortgage as an emergency fund although I felt that holding extra in the mortgage would save me interest in the long term. The good news is my car, boat and motorcycle are all paid and I have no credit card or any other debt besides the mortgage. The job loss slows me down from my goal but I am not out of the game yet. Is it wrong to use my mortgage as an Emergency Fund although I felt that holding extra in the mortgage would save me interest in the long term? $48,000 to go on the mortgage and counting.

Gail Says: Now you know why the Emergency Fund is so important. As for whether it is wrong to have put the money into your mortgage, that depends on whether you can get at the money now, or must take a loan (and pay interest, higher than your mortgage) until your mortgage comes up for renewal (at which point you should be able to do an equity take-out to boost your emergency fund.) Everyone has different ways of doing things. If you can get access to credit and are willing to eat the interest costs, hey, then you can make it work.

 

N Wrote: My husband and I are both 53 years of age and both work full-time with a combined gross income of approximately $110,000/year. We have paid out our mortgage and have no credit cards. We do have a car payment and also a line of credit, which concerns me the most. The balance we owe on the line of credit is roughly $90,000. We are making regular payments and extra payments with my husband’s overtime, income tax refunds, etc. but I’m not sure what it’s going to take to get this paid off. Any suggestions?

Gail Says: Have you figured out how much to pay in order to get it paid off by a specific date. This is the step people seem to skip. If you decide you want to take 5 years to get it paid off, you take the principle and divide it by 60 (months). That would = $1,500/month to the principal. Then you have to calculate the interest. Take the principal, multiply by the interest rate, divide by 100 and then again by 12. So if your interest rate were 5%, it would be $90,000 x 5 ÷ 100 ÷ 12 = $375, which is what you’d have to pay in interest, for a total of $1,875 a month. Now you plug in your numbers and make your plan.

 

A Wrote: I had a question for you that I hope you could help me answer, or at least give me your input on. I’ve paid off $22k in debt, with $11k remaining. My debt free date was anticipated to be July 2015, but I don’t see that happening anymore.

I fleshed out my taxes and I owe $3k. I don’t have that set aside to pay the CRA, so I started looking at RRSP Loans. Tangerine has loans for 1.5%, but I’d have to borrow around $7,500 to get me to zero taxes owed (my highest marginal tax rate is 39%). That means the $1,000 I have for debt repayment on my $11k debt (at 0%) would be chopped down to about $350 per month because of the RRSP instalment loan.

The trouble I’m coming up against us that it would just be a starting a double-edged sword/cycle. Through work I am saving 14% of my gross salary for retirement (tax adjusted by payroll); even while paying 30% (ish) to debt. But if I’m taking the next 12 months paying off this RRSP Loan, I won’t be able to get ahead for next year at tax time when I will again owe about $3k – the $3k in taxes comes from a property that wouldn’t sell and isn’t quite cash flow positive when taxes are involved.

So I guess what I’m asking is, am I better to get debt free this year and pay the $3k in taxes, letting me still be debt free by the end of 2015, thereby getting in front of the taxes for next year? Otherwise I feel like it’ll be a cycle of RRSP loans for indefinite future.

Gail Says: You are absolutely right about the fact that the RSP loan, although considered “good debt” would in fact still be debt and would put you on a cycle of borrowing and paying back RSP loans. You are better off paying the taxes and then saving the money for future RSP contributions. In the meantime make sure you’re claiming for everything you can on your taxes. And figure out why you underpaid this year so it doesn’t happen to you again.

Keep in mind that if you’re already contributing 14% of your gross income to savings for retirement, depending on your age (if I remember correctly you’re in your 30s right?) this is probably enough. Make sure you have a rock-solid emergency fund and have put your disability insurance in place before you save more for retirement.

 

D Wrote: I was wondering if you had an opinion on the trade-off for young folks like myself between maximizing RRSP contributions (at least up to $25,000) now for the tax return to build a down payment faster, or saving the RRSP contribution room for later on when you are in a higher tax bracket to get more out of the contribution room? I know a lot of it would be subjective around how eager you are to buy a house, but I am curious in terms of the math of the relative value of purchasing a home to grow in value for a little longer or hanging onto the contribution room.

Gail Says: Just because you make the contribution to the RRSP doesn’t mean you have to claim the deduction. You can hold that deduction until a year in which your tax bracket is higher before you claim. Yes, I know most people don’t realize this, but it is true. So go ahead and make your RSP contributions to build up your home down payment, but don’t claim the deductions until you get the tax-bang you’re looking for.