When you amalgamate your debt into a new fixed mortgage loan – it certainly makes the payments easier and often lowers the interest cost considerably – all very good things! But, remember that the banks are “in it to make money” and they definitely do make more money in a fixed rate product over a variable rate one. As well, they often tell you it is a good idea to extend the amortization out to 25 years to make the monthly payments easier on the budget, all the while knowing full well that you will often pay three times the amount of debt over the life of the mortgage. A fixed loan structure calculates interest “semi-annually” or as BNS likes to call it…calculated “half-yearly.” That means that interest is pre-set on the outstanding balance twice a year – usually January and July. Interest is laid down and essentially pre-calculated based on the payment structure you choose. If you were to put a lump sum payment down on your loan, let’s say in March, the principle would go down by your prepayment, however the interest would not adjust downward based on the lower balance until the product opens and adjusts the interest again, which would be in July. Essentially, you have two 6-month blocks of interest that is not adjusted until the product “semi-annually” reviews the outstanding balance and recalculates the interest. I always advise clients to choose a variable rate loan if amalgamating debt. It is the only Canadian product that will readjust the interest monthly based on the outstanding balance, (similar to a line or credit) allowing clients to have a true “pay-for-what-you-owe” product. Why would you want to pay interest on interest in a fixed structure? Instead, consider a low rate variable product and avoid a compounded, up-front interest structure.
When You Consolidate Debt – Is it Better to Have a Fixed or Variable Loan?
By AskMoneyLady|2019-10-31T11:58:50-04:0031 October 2019|Daily Advice Tips|0 Comments
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About the Author: AskMoneyLady
Christine Ibbotson is an Canadian Author, National and Syndicated News Columnist, and Professional Financial Speaker and Presenter. She also has three radio shows called the “Ask The Money Lady Minute,” “Your Money Today” and a live-call in show called “Ask The Money Lady.” She writes for over 630 Newspapers in Canada with over 21 million readers and is heard on 327 radio stations across Canada. Christine is the Author of her book entitled "How to Retire Debt Free & Wealthy" available on Amazon and Indigo. In How to Retire Debt-Free and Wealthy, Christine offers accessible and realistic guidelines in a series of achievable steps, from debt elimination to wealth management, teaching readers how to create their own customizable financial plans.
Dear Money Lady, My adult daughter just moved back home to save money and brought her boyfriend with her. I like the boyfriend, but right now he doesn’t have a job… Gallery
Dear Money Lady, My adult daughter just moved back home to save money and brought her boyfriend with her. I like the boyfriend, but right now he doesn’t have a job…