Please Help Me Help My Mom - Repaying Debt Question

[Spenny]

Hi All



This might be a pretty basic question but I'm not very experienced with this stuff, and I always see quality posts in this forum so here goes..



I'm trying to advise my Mom on how to best pay her debts but I'm not sure how. If you can offer any advice or direction at all it would be very greatly appreciated by a little old lady! Here is her situation:



Current Mortgage

Debt: 40k

Rate: 2.99%

Type: Closed Prepayment

Payment: 700/month

Maturity: Jan 2016

Prepayment Privilege: "15% + 15%" + "Match-a-Payment"



Visa Card

Debt: 30k

Rate: 4%



Disposable Income

1,200/month



Investment Portfolio

15k GIC due in December 2013

5k GIC due in August 2014



Analysis

So ideally I would have liked to use both of her GIC investments (20k total) to pay down her Visa and then just pay the minimum on the mortgage and the remaining disposable income on the Visa in order to "snowball" her debt, but that seems impossible with the set 700 mortgage payments. That's where my expertise ends.



I spoke with an advisor at her bank and the only option she offered was to use the 15k GIC in December to pay down the Visa card to a remaining balance of 15k, and then transfer that balance to her mortgage on a "new blended rate" of around 3.55% with an amort of 5 years (assuming payment of 1200/month). I think she can also do blends with different amorts/rates.



How can this be analyzed and compared to alternatives? Are there any benefits to this approach? Are there any alternatives? Is there a clear winner here? Very open to suggestions!



Many thanks

Spenny

 

[Sherilynn]

If the Visa card has only a 4% interest rate, it may not make sense to blend the debt into the mortgage thereby increasing your mortgage rate to 3.55%. If she uses the GIC's to pay down the Visa, then the overall interest payment could actually be higher if blended.



The best answer really depends on her goal. Is it to reduce monthly payments, reduce interest payments, or pay the debt faster?



For example: if her goal is to reduce monthly payments, it may be possible to extend the amortization when she blends her debts. Some banks will extend up to the original amortization length, so she could perhaps choose a payment amount that suits her and extend the amortization to match. However, this is only advisable for people who are responsible with credit and committed to making extra payments, otherwise the total interest expense over the long term is HUGE.



For our personal mortgage, we chose the longest possible amortization, but we do automatic matched payments every month. Advantages: 1) we are paying our mortgage faster than if we had chosen a higher regular payment, and 2) we are not committed to the double payment and can stop it for a while if required.



ATB has great mortgage comparison tools: http://www.atb.com/personal-banking/tools-and-resources/Pages/mortgage-calculators.aspx

 

[invst4profit]

As already pointed out it depends a lot on her goals.

With a mortgage of only $40,000 she must have considerable equity in her home. I would suggest she sell the home and either move down to something less expensive or to a rental property. Either would allow her the extra cash to pay off her debts.

This is where her goals come into play. She may say she does not wish to move, rent, give up the family home or whatever excuse comes to mind but the fact remains it will eliminate her dept.

If keeping the home is more important than paying off the debt then the debt is not that much of a burden for her. The decision should be easy to make.

 

[Spenny]

THANK YOU Sherilynn,

Yes you are right it would help to clarify the question. What I am asking is how can she minimize her total interest payments under the assumption that she has $1200/month to use freely.



What you mention about automatic matched payments is interesting. I wonder if my mother has this option. Does this mean that any given month she can pay $1400 instead of $700 with no penalty?



Yes I am not convinced that the blended rate is the best option either. I will try out that link that you provided now!



THANK YOU Invst4profit, I like your quote!

I completely agree with you for many reasons about selling/renting the house, but for personal reasons that doesn't appeal to her at all. Yes you are correct, she is not in any sort of desperate state to erase her debt. I am just trying to help her minimize the amount of interest she has to pay, ie- save some money.

 

[Sherilynn]

With Scotiabank's Match-a-Payment program, we are able to automatically match every payment plus make the 15% lump sum payment annually. So we are paying an extra $1200 per month in matched payments and can prepay up to $30k as a lump sum. We should have our 30 year mortgage paid by the end of year 5.

 

[RedlineBrett]

Are you sure the CC interest rate is only 4%?



I'd cash the GIC and put down 15k on the CC in December. There should be some interest returning on the GIC investment and this should go against the balance as well.



I would take your mom's credit card, so as not to make the problem any worse. She'll need to pay cash for everything with her remaining $1200/month.



With the $5k GIC next year she will be able to pay down the balance of the CC debt in less than a year.



Once she has the higher CC debt paid down she gets to work on the mortgage