Twice recently, a client told me they planned to cash in their investments to pay off their credit cards.

I understand the instinct. The debt feels heavy, the money is sitting there, and clearing it in one move is appealing.

Selling the investments is not the only way to clear the debt, though. It’s worth seeing the numbers on the other route before deciding. Here are three recent files. Details are changed to protect privacy, and figures are rounded.

File 1: eleven payments down to one smaller loan

This client had eleven separate debts, mostly credit cards and lines of credit, with rates up to 26% on some of them. The payments on that debt alone came to about $5,650 a month. With the mortgage on top, the household payment was about $8,040 a month, and they were struggling to make all of the payments each month.

They planned to cash in their investments to clear it.

Instead, we paid out ten of the eleven debts through a refinance. One smaller loan stayed in place. Their total monthly payment dropped from about $8,040 to about $3,740. That’s about $4,300 a month back in their hands, and the investments stayed where they were.

With that much room in the monthly budget, they can now put part of it toward extra mortgage payments and/or toward building up their investments. The freed-up cash flow doesn’t just relieve the pressure. It can start working for them.

There are trade-offs. The amortization went from 20 years remaining to 30, and the break penalty of about $7,700 was added to the new mortgage. Part of the lower payment comes from spreading the debt over a longer period, so it costs more in total interest if held for the full term. Extra payments are one way to offset that, and adding to their investments is another.

File 2: three debts, about $800 a month

This was a smaller file with the same plan. The client had about $26K spread across two credit cards and a line of credit, and planned to cash in investments to clear it. The payments on those three debts came to about $800 a month.

Paying them out through a refinance raised the mortgage payment by about $300, and the $800 in debt payments disappeared. The net result was about $500 a month less, with the investments left in place.

That $500 a month was the difference between barely making ends meet and being a little more comfortable.

The mortgage balance went up by the amount of the debt, the closing costs and the break penalty. The amortization stayed the same, and the rate came down slightly. They’re on the same timeline to be mortgage-free as before, with the debt folded into it.

File 3: two mortgages, a HELOC and credit cards

This one was consolidation only, with no investments involved. The client had two mortgages, a HELOC and several credit cards, about $110K in all outside the first mortgage. One mortgage was paid biweekly and the other was not, so payments were coming out of the account all the time.

We combined everything into one mortgage at a lower rate. It’s now one monthly payment, and about $315 less than before.

The break penalty of about $5,000 was added to the new mortgage, so the mortgage amount went up. The amortization did not. They’re still on track to be debt free in about the same amount of time, with one payment instead of many.

Cashback offset some of the costs

In all three files, I was able to place the mortgage with a lender that offered cashback, which offset some of the fees.

How these were approved

The first two clients did not qualify on income through standard methods, but both had significant liquid assets. Some lenders have programs that look at assets as well as income, which is how those two refinances were structured. The third qualified through standard methods. Programs and conditions vary by lender, and not every client or property will qualify.

What to compare before selling investments

• The cost of selling. Taxes and any lost growth are questions for a financial planner or accountant.
• The cost of the refinance. Break penalty, legal fees and appraisal, whether they’re added to the new mortgage, and whether a lender’s cashback offsets some of it.
• The new payment. Whether the amortization changes, and what that does to total interest.

I can run the mortgage side of that comparison. The investment and tax side belongs with a planner or accountant.

Thinking of refinancing to pay off debt? Connect with me at 249-480-1249 and I’ll run the math on your situation.

Call or text 249-480-1249.
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HumberBayMortgages.ca

Simon Browning | Mortgage Agent Level 2 | BRX Mortgage 13463

This content is for informational purposes only and does not constitute financial advice. Examples are based on real files with details changed and figures rounded. Individual results vary. Lender programs, rates and policies change. Always consult a licensed mortgage professional, and a financial planner or accountant for the investment and tax side, before making decisions.