Your Financial Plan to Becoming Debt-Free Post-COVID
Tara Gentles • May 20, 2020
Although everyone is experiencing the impact of COVID-19 differently, one thing has become evident. As a result of the pandemic, we’re all paying closer attention to our finances. Looking at life post-COVID, it’s going to be essential to have a financial plan.
Here are some action points to consider as life returns to some sense of routine and as you plan your financial future.
Pay off your revolving consumer debt first.
If you have consumer debt, or if you’ve gone into debt to cover your expenses through social-isolation, paying off any consumer debt should be your priority. This would be your credit cards and line of credits.
You want to start by making any additional payments on the highest interest debt while maintaining minimum payments on everything else. Once the first debt is paid off, roll all your payments onto your next debt. And so on, until you’ve paid off all your revolving consumer debt.
Set up an emergency fund second.
It doesn’t make much sense to put money in a bank account for an emergency fund when you have revolving debt that is incurring interest. Once you’ve paid off all your revolving debt, you will still have access to that money again should you need it, which acts like an expensive emergency fund before you have money in the bank.
Finance experts suggest you should have 3-6 months in a savings account in case you lose your job or experience unforeseen health issues. And in the face of the most recent global pandemic; the unexpected has just happened, this is the proof that the experts are right, and having an emergency fund is an excellent idea.
Then pay off your instalment loans.
With all your revolving debt paid off and a healthy amount of money in the bank to prepare for the next national emergency, you should start paying off your instalment loans, like a car loan or student loans. Start with the highest interest loans first, working your way through until everything is paid off. Most loans will allow you to make additional payments, double-up on payments when possible.
Start saving for a downpayment.
If you don’t yet own a home, and you would like to work through a plan to get you there, please contact me anytime. Although you don’t have to be completely debt-free to qualify for a mortgage, the less money you owe, the more money you are allowed to borrow in mortgage financing.
And the same principles used to pay down your debt can be used to save for a downpayment. The more money you have as a downpayment, the more you qualify for, and the less interest you will pay over the long run.
If you already own a home, you’re debt-free, and you have a healthy emergency fund, you should consider accelerating your mortgage payments.
Accelerate your payment frequency.
Making the change from monthly payments to accelerated bi-weekly payments is one of the easiest ways you can make a difference to the bottom line of your mortgage. Most people don’t even notice the difference.
A traditional mortgage splits the amount owing to 12 equal monthly payments. Accelerated biweekly is simply taking a regular monthly payment and dividing it in two, but instead of making 24 payments, you make 26. The extra two payments accelerate the pay down of your mortgage.
Increase your mortgage payment amount.
Unless you opted for a “no-frills” mortgage, chances are you can increase your regular mortgage payment by 10-25%. This is an excellent option if you have some extra cash flow to spend in your budget. This money will go directly towards paying down the principal amount owing on your mortgage and isn’t a prepayment of interest.
The more money you can pay down when you first get your mortgage, the better, as it has a compound effect, meaning you will pay less interest over the life of your mortgage.
Also, by voluntarily increasing your mortgage payment, it’s kind of like signing up for a long term forced savings plan where equity builds in your house rather than your bank account.
Make a lump-sum payment.
Again, unless you have a “no-frills” mortgage, you should be able to make bulk payments to your mortgage. Depending on your lender and your mortgage product, you should be able to put down anywhere from 10-25% of the original mortgage balance. Some lenders are particular about when you can make these payments; however, if you haven’t taken advantage of a lump sum payment yet this year, you will be eligible.
Review your options regularly.
As your mortgage payments are withdrawn from your account regularly, it’s easy to simply put your mortgage payments on auto-pilot, especially if you have opted for a five year fixed term.
Regardless of the terms of your mortgage, it’s a good idea to give your mortgage an annual review. There may be opportunities to refinance and lower your interest rate, or maybe not. Still, the point of reviewing your mortgage annually is that you are conscious about making decisions regarding your mortgage.
Want to review your existing mortgage, or discuss getting a new one?
Contact me anytime!
Tara Gentles
CANADIAN MORTGAGE EXPERT
RECENT POSTS
If you have a variable rate mortgage and recent economic news has you thinking about locking into a fixed rate, here’s what you can expect will happen. You can expect to pay a higher interest rate over the remainder of your term, while you could end up paying a significantly higher mortgage penalty should you need to break your mortgage before the end of your term. Now, each lender has a slightly different way that they handle the process of switching from a variable rate to a fixed rate. Still, it’s safe to say that regardless of which lender you’re with, you’ll end up paying more money in interest and potentially way more money down the line in mortgage penalties should you have to break your mortgage. Interest rates on fixed rate mortgages Fixed rate mortgages come with a higher interest rate than variable rate mortgages. If you’re a variable rate mortgage holder, this is one of the reasons you went variable in the first place; to secure the lower rate. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain.” And while it’s true that because the variable rate is tied to prime, it can increase (or decrease) within your term, there are controls in place to ensure that rates don’t take a roller coaster ride. The Bank of Canada has eight prescheduled rate announcements per year, where they rarely move more than 0.25% per announcement, making it impossible for your variable rate to double overnight. Penalties on fixed rate mortgages Each lender has a different way of calculating the cost to break a mortgage. However, generally speaking, breaking a variable rate mortgage will cost roughly three months of interest or approximately 0.5% of the total mortgage balance. While breaking a fixed rate mortgage could cost upwards of 4% of the total mortgage balance should you need to break it early and you’re required to pay an interest rate differential penalty. For example, on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more depending on the lender and how they calculate their interest rate differential penalty. The flexibility of a variable rate mortgage vs the cost of breaking a fixed rate mortgage is likely another reason you went with a variable rate in the first place. Breaking your mortgage contract Did you know that almost 60% of Canadians will break their current mortgage at an average of 38 months? And while you might have the best intention of staying with your existing mortgage for the remainder of your term, sometimes life happens, you need to make a change. Here’s is a list of potential reasons you might need to break your mortgage before the end of the term. Certainly worth reviewing before committing to a fixed rate mortgage. Sale of your property because of a job relocation. Purchase of a new home. Access equity from your home. Refinance your home to pay off consumer debt. Refinance your home to fund a new business. Because you got married, you combine assets and want to live together in a new property. Because you got divorced, you need to split up your assets and access the equity in your property Because you or someone close to you got sick Because you lost your job or because you got a new one You want to remove someone from the title. You want to pay off your mortgage before the maturity date. Essentially, locking your variable rate mortgage into a fixed rate is choosing to voluntarily pay more interest to the lender while giving up some of the flexibility should you need to break your mortgage. If you’d like to discuss this in greater detail, please connect anytime. It would be a pleasure to walk you through all your mortgage options and provide you with professional mortgage advice.
Credit. The ability of a customer to obtain goods or services before payment, based on the trust that you will make payments in the future. When you borrow money to buy a property, you’ll be required to prove that you have a good history of managing your credit. That is, making good on all your payments. But what exactly is a “good history of managing credit”? What are lenders looking at when they assess your credit report? If you’re new to managing your credit, an easy way to remember the minimum credit requirements for mortgage financing is the 2/2/2 rule. Two active trade lines established over a minimum period of two years, with a minimum limit of two thousand dollars, is what lenders are looking for. A trade line could be a credit card, an instalment loan, a car loan, or a line of credit; basically, anytime a lender extends credit to you. Your repayment history is kept on your credit report and generates a credit score. For a tradeline to be considered active, you must have used it for at least one month and then once every three months. To build a good credit history, both of your tradelines need to be used for at least two years. This history gives the lender confidence that you’ve established good credit habits over a decent length of time. Two thousand dollars is the bare minimum limit required on your trade lines. So if you have a credit card with a $1000 limit and a line of credit with a $2500 limit, you would be okay as your limit would be $3500. If you’re managing your credit well, chances are you will be offered a limit increase. It’s a good idea to take it. Mortgage Lenders want to know that you can handle borrowing money. Now, don’t confuse the limit with the balance. You don’t have to carry a balance on your trade lines for them to be considered active. To build credit, it’s best to use your tradelines but pay them off in full every month in the case of credit cards and make all your loan payments on time. A great way to use your credit is to pay your bills via direct withdrawal from your credit card, then set up a regular transfer from your bank account to pay off the credit card in full every month. Automation becomes your best friend. Just make sure you keep on top of your banking to ensure everything works as it should. Now, you might be thinking, what about my credit score, isn’t that important when talking about building a credit profile to secure a mortgage? Well, your credit score is important, but if you have two tradelines, reporting for two years, with a minimum limit of two thousand dollars, without missing any payments, your credit score will take care of itself, and you should have no worries. With that said, it never hurts to take a look at your credit every once and a while to ensure no errors are reported on your credit bureau. So, if you’re thinking about buying a property in the next couple of years and want to make sure that you have good enough credit to qualify, let’s talk. Connect anytime; it would be a pleasure to work with you and help you to understand better how your credit impacts mortgage qualification.
Let's Talk!
Contact Us
Privacy Policy | BrokerSquared Paragon Mortgage Group Is powered by Tango Financial