Monday makeover: Two-pronged approach targets mortgage and retirement savings

Toronto Star, Deanne Gage, December 2013

Luke is a 45-year-old divorced father of two school-aged children.

He has no debts except for his mortgage. But for someone who makes $102,000, this mortgage is substantial – $495,000 on a home valued at $1.1 million. His situation is best described as house rich and cash poor.

He wants to know how he should focus his efforts: paying down his mortgage or saving for retirement, which he hopes will be in 20 years' time. He currently has $90,000 in his RRSPs and no pension plan, but would like to have $60,000 a year (in today's dollars) in retirement income.

The Star asked Blair Guilfoyle, a Toronto-based financial planner with Guilfoyle Financial, to look at Luke's situation.

Luke is in better financial shape than he might feel at the moment, says Guilfoyle. But to be in an even better situation, he needs to pay down debt and save for retirement simultaneously. "Luke's problem is that he doesn't have a specific plan," Guilfoyle says. "He needs to focus on both immediately."

Luke's house debts are actually divided into two loans: he has a $355,000 mortgage at 2.99 per cent interest and a $140,000 home equity line of credit (that he used to buy out his ex-wife) at 4 per cent interest. Step one is combining his line of credit with his mortgage. Doing so will minimize interest costs, but more importantly, he'll establish an end date for paying off all the debt. In this case, Guilfoyle recommends a 20-year amortization, which will ensure the mortgage is gone by age 65, his ideal retirement age.

There's a $1,600 surplus between Luke's monthly expenses ($4,349) and his monthly income ($5,950). Luke had been using the extra funds to tackle his line of credit but now that it's combined with his mortgage, Guilfoyle recommends using the excess money in a different way. He should contribute $1,000 toward his RRSPs, and $600 toward a tax-free savings account, which could be used as both an emergency account, and funding extras such as an annual vacation for his kids.

This article appeared in the Toronto Star in December 2013. It is reprinted with permission.

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