Save for Retirement by Pulling Debt Together with your Mortgage

Many Canadians are facing the financial pressures of trying to save for retirement, but with perhaps too much debt and a tight monthly cash flow, it can seem impossible. Luckily with the right plan in place, it is possible to simplify your debt, reduce your interest costs and save for retirement without earning more or cutting your spending budget.

How refinancing can help

If you have enough home equity (you can’t refinance a mortgage above an 80 per cent loan to value), you can use that equity to roll your high-interest debt – credit cards or a car loan, for example – into a low-rate mortgage and make a large RRSP contribution if you have contribution room.

Here’s an example of debts including a mortgage, car loan and credit cards totaling $225,000. If you have enough equity, you can roll that debt into a new $233,000 mortgage, including a fee to break the existing mortgage and take advantage of a great payoff in the end.

		Current	New
	Today	Monthly Payments*	Monthly Payment*
Mortgage	$175,000	$969	$1,144
Car loan	$25,000	$495	$0
All credit cards	$25,000	$655	$0
Total		$2,119	$1,144
Add $25,000 RRSP Contribution ($258,000 mortgage)			$1,266

*4.5% current mortgage, 3.34% new mortgage, 25 year am. Credit cards 19.5% and car loan 7%, both at 5 year am. OAC. Subject to change. For illustration purposes only.

By pulling debt together into a low-rate mortgage, your monthly debt payment is $975 less each month – a great improvement in cash flow! If $500 of that extra cash flow is put back into your mortgage, your mortgage amortization is reduced from 25 years to 15.

If a $25,000 RRSP contribution is also made (assuming you have contribution room), the monthly payment is still reduced by a large amount – $933 per month. Assuming a 40% marginal tax bracket, there may be a tax refund of $10,000 from the RRSP contribution. If that refund and $500 of the extra cash flow each month is put into the mortgage, the $25,000 RRSP amount added to the mortgage is paid off in approximately 2.3 years!

For some homeowners, this is a great way to save more and pay less! Not only can you make your monthly debt payment smaller and save on interest, you also save for retirement — all in one! Manage your debt, save more for retirement, and enjoy a new financial life.