The debt. Don’t Rush Your Mortgage Because of Renewing Rates

In the time when interest rates are sky high, it’s naturally to flatly panic about renewing a larger mortgage and debt, but your concerns are unfounded. Mortgage rates are actually preferable to other borrowing methods, meaning you don’t need to be in such a hurry to pay it off.

Chisel Away at Higher-Rate Debts

It’s hard to keep a cool head in the face of a mountainous mortgage. However, there are steps you can take that’ll set you on the right track to an eventual debt free bliss.  Financial planner Noel D’Souza explains that you should first and foremost take chunks out of debts with the highest rates while contributing to your retirement fund or tax-free savings account.

Mr. D’Souza, a certified financial planner (CFP) with Money Coaches Canada, imparted this wisdom upon a Toronto couple with fears of renewed and potentially unaffordable mortgage rates. The couple is currently carrying a $600,000 mortgage debt coupled with a $120,000 credit-card/line-of-credit debt, and their 2/5ths of the way into a five-year mortgage with a 3 percent rate.

Comparatively, their credit card has a rate of 20 percent and their line of credit is around 5 percent. Given these higher rates, Mr. D’Souza sees the obvious choice as alleviating the credit card and line of credit debts before touching your mortgage, even in the face of rising mortgage rates and limited funds.

Start Nurturing Your RRSPs

After you’ve steadily cut down your credit debts, it’s time to focus on RRSPs instead of your mortgage. The Husband in the aforementioned couple has a 53 percent marginal tax rate, with the likelihood of existing in the lower tax bracket come retirement. Mr. D’Souza believes if you do the quick math, it’ll prove that come retirement, the 2018 tax break on an RRSP contribution will far eclipse the taxes paid when the husband makes withdrawals from his RRSP.

Mr. D’Souza is not insinuating utilizing your RRSP tax refund as a means for the couple to pay down their mortgage. The money, he insists, is best spent on credit-card debt.

Why Your Best Bet is Mortgage Debt

It makes perfect sense to really want to rush your mortgage when you know rates will shoot up. More often than not, it’ll be the biggest debt you’ll ever be faced with. But when you really break it down, of all debt, a mortgage is your best bet.

Of course, we’ve highlighted the lower rates when compared to credit-card and line-of-credit debts. But why else? Unlike credit cards and lines-of-credit, a mortgage is a money borrowed to purchase an appreciating asset, whereas the former debts don’t appreciate at all.

The rigid repayment schedules of 25-years or 30-years maximum for the majority of borrowers just need to make their payments and the mortgage will disappear.

However, some choose an accelerated bi-weekly mortgage of 22 years, like Mr. Souza’s Toronto couple, of whom he insisted they change their payment plan. Instead, point the couple’s focus to the bulk of their expedited payment efforts on financial landmines like 20% credit card debts. The mortgage may be the bigger number in front of you, but non-mortgage higher interest debts are far too volatile to ignore.

Does Paying Off Higher-Interest Debts Solve Higher Mortgage Rates?

The fact is, ridding yourself of non-mortgage debts takes away the elongated financial burden of credit-card and line-of-credit bills. With the extra money saved, you’ll be better equipped to neutralize renewed and elevated mortgage rates.

While most people have the inclination to pay off their biggest debt first, getting rid of the higher-interest debts will leave you with more in the bank in the long run.