Here’s to another year, new resolutions, new promises, new outlook, new finances – well, maybe not?
The year that past will likely be filled with fond memories of personal triumphs and reflection on all that we achieved. The brave amongst us will reflect on our finances however it is likely that many of will defer this activity until tax time or when the first of the credit card statements from the holiday shopping start to arrive.
Why is it that so many of us avoid looking at our finances, in particular, our debt, until we absolutely have to? I suppose this is because for some, reviewing our debts is painful since numbers don’t lie; while for others, well we would rather just not bother! Well what is the point? After all, once you owe the money, we continue to repay it based on the terms set out in our contract until it is paid off, correct? What else is there to do?
Just like any other financial review- investment plan, estate plan, retirement plan or insurance plan; an annual debt repayment plan (which includes your mortgage) review is critical and can help you save thousands of dollars in the long run.
The biggest economic concern for the Canadian government is the high level of Canadian household indebtedness. Currently Canadian household debt to income ratio sits at 164%; this means that for every $1 that Canadians earn we owe $1.64. To offer you perspective, the U.S. & U.K. households were at approx 160% household debt to income ratios when their respective economies started to show signs of instability.
Calculating your household debt to income ratio and itemizing your household debt will help you prioritize which debts to pay down more aggressively; generally a good strategy is to tackle the higher interest rate debts first.
Gather all your monthly statements including your annual mortgage statement and create a consolidated worksheet of all your outstanding debt. Simple tools like this TD Debt Management Tool
can help you get organized, and keep a copy of this saved somewhere so that your can compare the outstanding balance year over year.
In going through this exercise, you will have a picture (or a reality check) of how much you currently owe relative to your assets and income, which of course can help you gain some perspective on your overall financial health.
A good barometer of what amount of debt is “reasonable” I reference Canada Mortgage & Housing Corporation (CMHC). CMHC recommends that your total household debt (mortgage, credit cards, loans, lines of credit) plus household expenses including property taxes, utilities & maintenance fees when expressed as a percent should not exceed 42% of your gross income. Use this calculator to calculate your Total Debt Ratio.
Once you have listed all your outstanding debts, look for ways to pay down your debt faster.
First: Change your payment frequency. If you are paying your debts monthly, updating your payment frequency to a more frequent cycle, like a biweekly or weekly, can save you thousands over the life of your mortgage. In addition, since many employers pay biweekly, aligning debt repayment to pay cycles will make it easier to manage your budget and help avoid bouncing payments!
Second: Increase your payments even if it is by a small amount. Most lenders allow borrowers to prepay a certain percentage of the original mortgage principal each calendar year. At TD for example, mortgage customer can prepay up to 15% of their original mortgage principal annually and can also double up their regular mortgage payments; if your lender allows this consider even small increments like $50 or $100 per month additional as this can add up to a significant amount over the course of a few years.
Third:Consider consolidating through a mortgage refinance or an equity take-out. If your monthly cash flow is really stretched thin consolidating payments into one can help you stay organized and focus on paying down larger chunks as opposed to stretching yourself to make multiple payments. If consolidation is not a possibility because of credit or lack of equity then in the short term look for ways to pay down the debt with the highest interest rate first as this is where you’re likely paying the most in interest, while in the lease managing the minimum payments on all other debt. Once this is paid off, redirect all of the money you were paying here to the next item and so on and so forth until you are fully paid off.
Hopefully this offers our readers some food for thought. These are only a few things to consider; for a more detailed perspective it is best to meet with your Financial Advisor to devise a more personalized debt repayment plan.
About the Author
Farhaneh Haque is the Director of Mortgage Advice with TD Canada Trust, a leader in residential real estate mortgages and home equity lines of credit. With over 18 years of lending experience, she is entrusted with the responsibility of offering mortgage advice to help Canadians make informed decisions about home financing and ownership.
Farhaneh and her team draw upon research commissioned by TD Canada Trust, which reveals consumer attitudes and behavior related to home ownership such as choosing and buying a first home, renovating and greening a home, as well as understanding gender, regional and other demographic preferences. They also have access to proprietary research from TD Economics on topics such as Canadian interest rate forecasts and Canadian housing market insights
In her personal time, Farhaneh is an active member of community groups promoting youth education; in particular helping high school students in securing funding to pursue post secondary education.