Case #1: Mortgage Refinancing
A couple in their early 50’s was referred to us with a goal of retiring in 10 years. If they could pay off their debt, the projected growth on their assets would be enough to provide them with a fixed income to pay for their bills and lifestyle in retirement. If they couldn't pay off the debt, they would need to work part-time to make their debt payments.
$310,000 House Mortgage: $2,900/month for 17 more years
$150,000 RV Mortgage: $1,100/month for 22 more years
$80,000 HELOC: $500/month interest only
$10,000 Credit Card: $150/month interest only
$4,650/month to service $550,000 of debt.
By year 10 (the desired retirement age), they would still have:
Total debt still owing after year 10: $491,000.
A mortgage broker was able to show them a 25-year mortgage for $550,000 at 4.7% interest, making the monthly payment about $3,100 instead of $4,650 (saving $1,550/month).
This wraps all of the debt into one easy payment ($0 balance owing on the HELOC, credit cards, or RV).
By year 10, they would owe $402,000 on the mortgage.
The $1,550/month is redirected to their TFSA to build a "pay off debt quicker" fund, which, at 8% return, would grow to $280,000 by year 10.
Total debt owing after year 10: $122,000.
By repurposing money they already had going out the door each month, using compound interest in their favour instead of against them, in one move, their projected net worth in year one of retirement increased by $369,000.
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Type of Debt Balance Monthly Minimum Limit Interest Rate
Credit Card #1: $20,000 $600 $500 $20,000 20%
Credit Card #2: $7,000 $200 $200 $10,000 25%
Line of Credit: $3,000 $200 $25 $30,000 10%
Total: $30,000 $1,000 $725 $60,000
The three paydown options are a consolidation strategy, snowball strategy or an avalanche strategy.
Use the available line of credit limit to pay off the two credit cards.
The debt amount remains at $30,000, but is all in one place at a lower interest rate.
The minimum payment is now about $250 instead of $725 each month, which substantially increases the percentage of your $1,000/month that goes to principle pay down rather than interest.
Arrange the debts from smallest balance to highest balance.
Put everything down to the minimum payment except for the lowest balance.
$1,000 - $500 to card #1 - $200 to card #2 leaves $300/month to put towards the $3,000 line of credit balance.
Once this $3,000 is paid off, repurpose the $300/month towards the $7,000 credit card (creating a snowball effect).
Prioritize paying off the debt with the higher interest rate first.
Minimum payments on card #1 ($500)
Minimum payments on the LOC ($25)
$1,000 - $500 - $25 = $475
Even though the minimum payment on the $7,000 credit card is only $200, the avalanche strategy suggests using all $475 towards paying down this card since it has the highest interest rate at 25%.
Consumer Proposal (Story A)
Consumer Proposal (Story B)
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