My Mom needs help with Mortgage Renewal/Debt Repayment Plan

[Spenny]

Hi everyone,

INTRO:

I am trying to help my Mother with her mortgage renewal, and I’m wondering if anyone may be able to help me, as I am not very experienced with this stuff.



FACTS:

First of all she is almost 70 years old, lives alone.

I’d say there is a 50% chance that within the next 2 years she will sell the house. (Which would incur a penalty on closed mortgages, as far as I know)

For the 50% chance that she doesn’t sell the house, there is a 50% chance that she might find a basement tenant. (Which would increase her monthly debt payments)

Her financials are as follows:

$1200/month of disposable income to make debt payments

$16500 of credit card debt @ 4%

$26000 of mortgage debt @ 2.99% closed fixed 4 year term with 15/15 privileges (which is expiring in Jan 2016)

Not sure what the new rate will be but it is probably similar to her last one.
(Source: http://www.scotiabank.com/ca/en/0,,1112,00.html)

Please let me know if I can provide you with any other relevant information that could help.



QUESTIONS:

1)What is the optimal debt repayment strategy for her? If it involves at mortgage pls let me know if open/closed/fixed/variable etc

2)Does the fact that she may very well sell the house soon effect how she should approach this renewal?

3)Any questions I should ask the mortgage person at the bank during the meeting?

If I am missing any important factors here please do let me know. Also if you have any other creative approaches I would love to hear them. Although, I’m not really looking for advice regarding whether or not she should sell the house, or find a tenant, as I have already covered those topics in other posts where everyone here was very helpful.



IDEAS:

I’m thinking the debt should definitely be consolidated right?

Consolidate debt to Mortgage?
Pros: Probably a lower rate than her CC saving ~$750 in total on interest compared to CC consolidation
Cons: Less flexibility than CC and possibly a penalty if she sells

Consolidate debt to CC?
Pros: Increased flexibility in case she wants to sell house or increase payments
Cons: A rate slightly higher than the mortgage would be, but still not really that much higher.

Consolidate debt to new MBNA promotional 0% CC?
(source:https://apply.mbna.ca/applicationform/generateApplicationForm.htm?src=CQOR01&locale=en_CA)
Pros: They run this promotion every year, so if I do it every year for 3 years for her she will save ~$2000 vs 4% cc, and ~$1500 vs 3% mortgage plus more flexibility. Even if I only do this for one year and then put it back on the 4% at the end of the promotion she will still save money compared to the mortgage consolidation and have more flexibility.
Cons: This is my mom, she is older, and sometime it is just better to keep things simple. Also this means more work for me, applying for the card, making sure she makes the payments on time otherwise the promotional rate ends, and paying it off at the end of the year and transferring it back etc

Or is there anything else I am missing?

OK THANKS SO MUCH for reading and for anyone who responds, this would be a great XMAS gift for me and my mom!

 

[Spenny]

Actually, looking again at this link, the Mortgage rate for a 3 year fixed would be slightly higher than I estimated above (3.39% vs 2.99%) which would make a mortgage consolidation even less appealing than stated above it seems.

http://www.scotiabank.com/ca/en/0,,1112,00.html

 

[Matt Crowley]

I would consolidate the debt into the mortgage with the highest degree of flexibility. I worry that cc companies are going to get wise to the strategy of debt-hopping. CC debt is the worst way to manage personal debt as it is unsecured and revolving and will always be subject to the highest interest rates with the highest penalties if any of the payments are missed or late. I would highly recommend speaking with a broker on this issue. They are in the best position to recommend solution. Consider giving David Niven a call. He is an excellent broker.

DavidNiven
Managing Partner
Licensed Mortgage Associate
The Collin Bruce Mortgage Team
Ph 7804362511

 

[Thomas Beyer]

Why not get a line of credit ( LOC ) in January ? Rates are prime to prime plus one, so slightly higher than a mortgage, but more flexible. Then pay of her CC and cut it up. Anyone carrying CC debt needs to learn that this is not wise use of " credit ". Perhaps get one with a $5000 limit for online purchases like travel or airlines.

Credit cards are mislabeled. They ought to be called debt cards, or rather convenience cards. They are never intended for credit, except to benefit the vulture lender !

She will likely be able to get a LOC up to 50% of her house value. No penalty on sale, and can be used for trips to Bermuda or a cruise too.

Tell her that she should spend the equity in her house, because if she doesn't, you will ( after her passing, assuming you inherit her assets ).

Another option is an open mortgage but also higher rate.

LOC is best. Think of it as an overdraft facility on your chequing account.

 

[Spenny]

Thanks so much for your replies!

You both had very similar answers. Before your answers I was leaning toward saving the $2000 by using the MBNA 0% promotion. Your answers have lead me to revisit whether the risks/cons outweigh the benefits/pros of this option.

Benefits/Pros:

Probably save $2k in interest in total
If they stop the promotion after this year she would still save $1k for the year and then switch back to 4% CC debt.
Complete flexibility in terms of payments

Risks/Cons:

"I worry that cc companies are going to get wise to the strategy of debt-hopping."
Like I mentioned above, if mbna chooses to stop the promotion after one year, then I can easily just switch back to her 4% cc and still save $1k in total as opposed to $2k in interest.

"CC debt is the worst way to manage personal debt as it is unsecured and revolving"
The risks here are not clear to me. Perhaps this means it is not optimal for her in terms of her credit score? Even so that is not a big concern for me as she is in a position where she won't need to ask for any more loans.

"and will always be subject to the highest interest rates with the highest penalties if any of the payments are missed or late."
I do agree agree that is a noteworthy risk but I think it can easily be minimized. With a 0% promotional rate the minimum monthly payment is negligible, and late payments can easily be avoided by setting up automatic payments.

"Why not get a line of credit ( LOC ) in January ? Rates are prime to prime plus one, so slightly higher than a mortgage, but more flexible"
The reason why is that she would save at least $1000, but probably $2000, in total interest over three years if I use the 0% MBNA promotional cc. Maybe this does not seem like a lot of money to most people? I have to admit that it does to me. I completely agree that credit cards are often used incorrectly by most people, but I also think there are some advantages to them when used rationally.

Summary
After this analysis it seems to me that benefits of saving at least $1000, and probably $2000, using the 0% promotion still seems to outweigh any of the risks listed above. Don't get me wrong I would actually LOVE to be proven wrong about this! Perhaps there is something I am missing in my analysis, and if that's the case PLEASE do let me know.

 

[Thomas Beyer]

Sure, promotional CC debt hopping makes sense, beating the CC vulture lenders at their own quasi-criminal game. Be aware of fine print as being one day late, once, could cancel your cheap credit and go back to high rates.

Best is not to have any CC debt at all and strictly use these cards for online purchases only. In Europe now you pay more using a CC, and maybe we see this coming too to Canada as ApplePay or PayPal becomes more common.

 

[Matt Crowley]

^ Thomas' solution makes more sense than mine. Allowing the flexibility for your mother to spend her life savings is another great point I overlooked. The LOC is probably the best option for this.

With the cc hopping, keep in mind that cheap debt is never available when you really need it. God forbid that an emergency comes up that requires a substantial amount of money to resolve...but putting this kind of expense on a promotional cc? I would be up nights worrying.

There is an attractiveness to stuffing it to the cc companies, but keep in mind you are at the mercy of the cc companies when it comes to renewal. Maybe you are approved for $20,000 but they look at your minimum payments and you are at 80% of your balance and decide they are pretty much in as deep with you as they want to be and now you will need to start paying off the balance. There is no telling how other cc companies will react either to changing economic conditions. The debt is based on very short-term commitments from the cc companies and they are a fickle bunch. (They have to be because they are managing the highest risk debt out there!)

 

[Spenny]

Thanks very much Thomas and Sweetzone for your thoughtful replies!

I think you have pretty much convinced me at this point. If it were me I would probably cc hop for the lowest rate but I think my mother should prioritize the option with lowest degree of risk and highest degree of simplicity.

Also worth noting is that I was previously provided with incorrect information. She does not currently have a credit card at 4% with a balance of $16500. What she currently has is a personal line of credit (secured by her house), and the rate of that LOC was recently lowered from 4% to 3.7%.

So when you say that a LOC is the best option, do you mean she should just consolidate her debt to this account and call it a day? Or is there a better option? My only concern about this option is that the rate is variable, but not sure how big a deal that is over 3 years. I guess the only option to lock in a rate would be to consolidate to a fixed mortgage..

 

[Thomas Beyer]

A fixed mortgage is slightly cheaper, however high payout penalties if discharged earlier. As such, it depends to a large degree on the likelihood of a sale "soon". If "soon" is 3 years out, then yes get a 2 or 3 year mortgage. If "soon" might be 2Q 2016 then just keep things flexible, i.e. LOC.

btw: Variable rates might get LOWER, you know ? Not just UP ! With persistent low il prices and thus, falling federal and AB revenues, we will see far more debt in this country and to get an even lower Can$ the Central bank might lower interest rates further.

I'd get as high an LOC as she can, say 50% of house value, then use what is required. No CC debt. Just a CC for online or convenience shopping as it is a modern day payment form that is required. There are now CC that actually take $s directly from your account, i.e. like debit.

 

[Spenny]

Thanks Thomas you have helped a lot!

I will try to negotiate a LOC with a higher limit and perhaps even a lower rate. Any tips for getting a lower rate? She is currently at prime +1. But the LOC is secured by the house and she has a very good credit score and long history with the bank. Should I ask for prime +.5?

 

[Thomas Beyer]

Thanks Thomas you have helped a lot!

I will try to negotiate a LOC with a higher limit and perhaps even a lower rate. Any tips for getting a lower rate? She is currently at prime +1. But the LOC is secured by the house and she has a very good credit score and long history with the bank. Should I ask for prime +.5?

Shop around. I have one at prime with ATB but we have plenty of corporate business there. So opening a CC and another account or 3 at that same bank might help.