With a festive count down we all said our goodbyes to 2012 and openly welcomed 2013!
Most of us look back at the year that past with fond memories of personal triumphs and reflect on all that we achieved and all that we thought we would achieve, but didn’t quite get there. Some will reflect on their finances; many will defer this activity until tax time or when the first of the credit card statements from the holiday shopping start to arrive. Only a few of us will include a review of our debts as part of our financial review.
After all, why should we? 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?
An Annual Debt Repayment Plan: A Must!
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.
So, where do you begin? Start by gathering all your monthly statements – including your annual mortgage statement – to create a consolidated worksheet of all your outstanding debt. Use tools like this TD Debt Management Tool to help get organized. Where possible, compare the outstanding balance year-over-year and tally up the total sum of payments made toward each account over the past twelve months.
In going through this exercise, you will have a snapshot 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.
The Big Benefits
It will help you see how much of your net income annually is directed toward debt repayment. 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. Here is a calculator to help you calculate your Total Debt Ratio.
The biggest economic concern facing the Canadian government are the high levels of Canadian household debt-to-income ratio which currently is at 164%; for every $1 that Canadians earn, we owe $1.64. The US & UK households were at approximately 160% household debt-to-income ratios when their 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.
Accelerate Debt Repayment
Equipped with this information, look for ways to accelerate debt repayment. There are several ways to do this.
First: Change your payment frequency. This is the easiest of changes since most of us are paid on a biweekly pay cycle. Update your mortgage or loans payment from monthly to biweekly. Doing this will not only make it easier to manage your budget but will also help you pay down your debt faster.
Second: Increase your payments even if it is by a small amount. Most lenders will allow you to pre-pay a certain percent of your original mortgage principal each calendar year. At TD, for example, a mortgage customer can pre-pay up to 15% of their original mortgage principal annually and can also double-up their regular mortgage payments. It is great to take full advantage of both these options, but if that is difficult, borrowers can consider even small increments like $50 or $100 per month additional.
Third: Consider consolidating debts through a refinance or an equity take-out. If this is not possible, look for ways to pay down the debt with the highest interest rate first.
These are only a few ways to do this to consider. For a more detailed perspective, it is best to meet with your Financial Advisor to review your plan, especially as you approach the RSP season in the next 60 days.