Author: Kirsten Mason

Not all debt is created equal – and not all debt is bad. In fact, you need some debt to establish a good credit rating. Being a responsible borrower means knowing which types of debt can help you reach your financial goals and which types leave you further behind. So how do you distinguish between debt that’s good and maybe not so good?  Good debt includes any investment or purchase that helps improve your overall financial position:

Mortgage loans. We are benefiting from historically low mortgage rates, and over the long term, property has gained in value. You also build equity as you pay down your mortgage. This combination of low mortgage rates and increasing home equity creates smart debt.

Investments. Certain investments generate income and capital gains. Often, the interest expense on money borrowed for investments is tax deductible. Borrowing money to maximize your RRSP contributions is also good debt, since you’re investing in your future and benefiting from tax sheltered investment growth.

Bad debt involves purchases where the value becomes lower than the original cost, and which can carry a high rate of interest, making them harder to pay off:

Credit cards. Though you need to activate and use at least one credit card to generate credit history, irresponsible use can get you deep into debt. If you usually carry a balance on your card and make only the minimum payment each month, you’ll end up paying significantly more in the long run.

Buying a new vehicle. Before you start shopping for new wheels, keep in mind that cars start depreciating in value as soon as you drive them off the lot. Try not to buy more car than you need!

Deferred purchases. Be wary of advertisements for big purchases like furniture or home electronics at places where you “do not pay until 2015!” Sellers add financing charges to the cost of these items, and you could also be slapped with a steep interest rate until the item is paid off.

Preventing or reducing credit card or other bad debt may seem overwhelming at first, but it is manageable. Avoid cash advances, since these carry high interest penalties; use your debit card or cash instead. Only use your credit card to buy what you can afford, and pay off the balance in full each month. If you’re still unsure about your debt situation, set up a meeting with your mortgage broker. He or she can take you through your finances and advise you how you can use your home equity to trade bad debt for smart debt, and give you some financial breathing room. The right refinancing package can help put an end to the monthly squeeze of too much credit card debt or too many loans, and help you get back into your financial comfort zone.

Brenda Colman, AMP, Mortgage Consultant, Invis Kamloops

P. 250-318-8118  E. ac.sivninull@namlocadnerb W. www.BrendaColman.ca

This article was provided by Brenda Colman of Invis in Kamloops.

Everyone loves to make forecasts for the New Year. With that in mind, we’ve put together a glimpse into the year ahead for Canadian homeowners – so you can plan for some great opportunities!

1.  Low rates early in the year!   So many financial experts were wrong last year when they predicted we’d see a rise in mortgage rates. But their loss is your gain. We are beginning 2012 once again at historically low mortgage rates.

2. “Green” money available until the end of March.  The popular Eco-Energy Retrofit Grant is still available until March 31, 2012. You can access up to $5000 for improvements for energy-saving renovations to your home, but you’ll need to act fast. Before you begin work, you must arrange for an NRCan-licensed energy advisor to perform a residential energy assessment of your home. After the work is complete, a post-retrofit evaluation must be done by March 31, 2012. Full details are available at www.oee.nrcan.gc.ca. To register, go to www.oee.nrcan.gc.ca/register.

3.  The wealth train is leaving the station! At some point rates will begin to rise to more normal levels of 5 or 6 per cent, and it’s possible the trend upward might start in 2012. If you are carrying household debt outside your mortgage, you have a great opportunity right now to board the “wealth train”. Roll your high-interest debt into a low-rate mortgage. Start spending sensibly, saving smart, and you’ll be well on your way to slashing your debt and building your wealth. When interest rates begin to rise, debt derails even the best financial plan. Do it now.

4.  Never renew with your eyes closed. When your mortgage comes up for renewal your lender sends out a note suggesting you renew at their current offer. Never renew your mortgage with your eyes closed! This is your moment of opportunity to negotiate the best possible deal. Who knows if the same lender is the best choice? If a renewal is in your financial future this year, bring us your renewal notice. There are some great options out there; we’ll help you look around.

5. Check out the re-advanceable mortgage! This is a brilliant mortgage concept for those who want to pay down their mortgage and have flexibility should an unexpected opportunity or expense arise.  The re-advanceable mortgage is the perfect solution. If an emergency comes up, an unexpected investment opportunity, or a special renovation project, you can access your equity without a fuss. It may be the “last mortgage you’ll ever need”.

6. Time to build an income buffer? It’s a bit ironic, but it’s always hardest to get money at the very time that you need it. If there is even a chance that your household income could take a hit this year, then talk to us about building a financial buffer using today’s low mortgage rates. Maybe you won’t need it. But if you do, you’ll be grateful you made the arrangements when you did. With the European debt crisis still reeking economic havoc worldwide, unemployment and income fluctuations are still a risk.

7. Speed up your mortgage pay-down. Before rates rise, take the opportunity to beat down your mortgage principal. Build a plan to take advantage of your lender’s prepayment privileges! Consider changing from monthly payments to weekly or bi-weekly payments, and take some or all of your tax refund and put it against your mortgage principal. Your interest costs will go down with every dollar you’ve reduced on your principal amount.

8. Build a financial cushion. Your high-interest credit card should never be your emergency fund. This year, build a financial cushion: get in the habit of putting a small sum from every paycheque into a special emergency fund. A nice plump emergency fund is smart saving.

9. Staying put? Instead of moving to get the home you want, consider the many benefits of staying put. The right renovation – an addition, a new family room, a fresh kitchen – might be all it takes to turn the house you’re in, into the home of your dreams. It is almost always less expensive to renovate than to relocate – if an upgrade to your lifestyle is what you’re after!

10. Get your annual mortgage checkup. It’s your financial “medical”; early detection of problems can save your financial life! We like to know how your mortgage is working for you – and look for opportunities to make the most of your greatest budgeting asset! Book a mortgage review and make sure your plan incorporates what may be ahead in 2012: it could pay big dividends in the year ahead!

Brenda Colman, Mortgage Consultant, Invis Kamloops

P. 250-318-8118  E. ac.sivninull@namlocadnerb W. www.BrendaColman.ca