Given the level of uncertainty within the marketplace, and political tensions throughout the world, it’s more important than ever for consumers to bulletproof their lifestyle.
We need to position ourselves to withstand fiscal shock (large interest increases), personal shock (loss of employment, sickness, accident), economic shock (recession, potential for war, food shortages and environmental shock (flooding, drought).
These may be managed in various ways, such as having liquid assets to draw down upon to help cover expenses or reduce one’s cash expenditure (cash outflow).
It’s a great time to re-evaluate your current fiscal position and understand the options available to help bulletproof your financial situation.
Best Case Scenario: I’m able to help you save money and improve your cash flow, allowing you to improve your Net Worth position.
Worst Case Scenario: You find out that you’re managing extremely well.
Freeing Up $2,295 Cash Flow
I recently worked with a client who bought their first home five years ago. They were a first-time home buyer, who had purchased their home right after graduation and within the first year of getting their job.
When we started working together, they had a fair bit of unsecured debt including student loans and some credit card debt.
With the increased costs of being a homeowner, such as property taxes, house insurance, utilities, and maintenance, they were restricted in their ability to save money or allocate funds to pay down the existing debt outstanding.
This impact was compounded by the fact they were in a Variable Rate Mortgage, so when rates jumped, their mortgage payment increased by $650/month.
They incurred more debt as they completed some renovations to the property over the past five years coupled with the jump in their mortgage payment.
The good news was that their property value increased substantially over the same five years. This increase has created a strong equity position within their home.
Here was their situation.
Debt Item | Balance | Monthly Payment |
Mortgage | $355,000 | $3,017 |
Credit Card | $78,600 | $1,572 (assuming 2% repayment) |
Unsecured Line of Credit | $76,600 | $652 (interest-only payment, Prime+3%) |
Total cash outflow (not including taxes, utilities) | $5,241 |
Note: On the unsecured lines of credit (LOC), there’s no principal payment, interest only. Using 2% as minimum required payment on the credit cards they pay $137/month on the debt.
Fortunately, the property value increased enough to rewrite this debt.
Restructuring the debt
The property appraised at $800,000, so at 80% loan to value, lenders are willing to lend $640,000 against this property.
Total mortgage requested is $520,000. This will payout the existing mortgage and all unsecured debt (credit card and unsecured lines of credit.)
Debt Item | Balance | Monthly Payment |
New Mortgage 30-year amortization, 5.54% | $520,000 | $2,945 |
Credit Card | $0 | $0 |
Unsecured Line of Credit | $0 | $0 |
Total cash outflow (not including taxes, utilities) | $2,945 |
This is a differential of $2,295/month in cash savings.
They were able to create a cash flow plan, allowing them to apply what they were saving to other debts, emergency cash savings, RSPs, TFSAs, or as pre-payment to the new mortgage.
Using one of the prepayment privileges in their new mortgage, the client can pay an additional $600/month, effectively dropping the amortization to 20 years. This still leaves them $1,695/month available to boost investments or lifestyle.
They now have options available as to how they want to move forward financially with less financial stress, due to lower monthly financial obligations.
If you’d like to free up some cash flow as well, please call me, and I’d be happy to help.