Debt Consolidation Loan Considerations in 2010

Toronto Mortgage Broker

It May Be Time To Get Serious About Debt Consolidation in 2010 If It’s Been Something You’ve Been Putting Off

If you’ve been reading the papers or watching the news lately, you may have noticed that the financial experts out there are starting to talk about interest rates going back up.

Many economists feel that the interest rate is lower than it should be, but has stayed at current levels for close to a year to protect the economy from slipping into a deeper recession.

Now that things are starting to turn around, there is a good chance we will start to see interest rate increases before the end of the year.

And while even an increase of one percent doesn’t seem like much, it can make a big difference to your annual interest expense when you’re starting at floating rates close to two percent.

For debt consolidation activities, the goal is to combine various outstanding debt together into a new mortgage which will carry a far lower average interest rate. While this will still be possible to achieve regardless of whether or not rates increase, there is the chance that you’ll be cutting into your cash flow longer term by not consolidating sooner than later.

For example, if a family has a $300,000 debt consolidation mortgage today locked in for 3.5%, the annual interest costs, using simple interest math with no principal repayment would be $10,500.

If the consolidation occurred after a one percentage point increase in the three year rate, the increase itself would equate to a 29% increase in your interest payments, or an additional $3,000 which would work out to $250 a month.

So even though rates are still going to be low no matter how much potential increases may be this year, the result is still going to cost you money.

Debt consolidations can involve large mortgage balances which will produce significant interest costs even with small rate increases as the example shows.

The key point here is to not be putting your consolidation plans off. At the same time, debt consolidation is largely about the number and if you can afford to wait and avoid repayment penalties, you may be further ahead by delaying a bit longer.

Just make sure you redo the math every couple of months, and if the benefit is there, you may want to take advantage of it before it gets eroded by any rate increases, or disappears all together.

If you want to review debt consolidation scenarios with me, please give me a call and we’ll crunch through the math together to see what makes the most sense for your situation.

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