Money123 Article: Newly Married Couple Want To Merge Their Debt With the Lowest Interest Rate

A newly married couple are combining their finances. Both have significant debt.

Their debt is made up of student loans, a car purchase, a mortgage, and a bit of credit card debt.

They asked a question on how to manage it in the most efficient manner and if they should merge all debt into one monthly payment. 

As a financial planner for Global News’ Money123 online email newsletter, I answer reader questions about investing, managing your finances, and planning for your future.

In the latest email to subscribers, I give this couple my insights on tackling their debt and how to get the lowest interest rates.

By the way, my answer is at the bottom of the email newsletter.

Here’s a link to the Global News Money123 email newsletter with what I recommend: https://globalnews.ca/newsletter/10594653/

The Question:

“My wife and I recently got married and are sorting out how to combine our finances. We both came into the relationship with significant debt ($15K for me across student loans and a car purchase) and her mortgage (19 years, $325K or so remaining) and a bit of credit card debt. Is there a way to combine all or most of this into one more manageable monthly payment? Is that recommended or will we end up paying a higher rate on the whole amount? Just trying to get a better handle on how to tackle this.”

— A Money123 reader 

Ed’s Answer:

“You should check the interest rates on your current debts before trying to refinance them. They might be at lower interest rates. Your student loan might be at a good interest rate and might give you a tax credit, depending on the type of student loan. Car loans are often at a lower interest rate if the company increased the car price to give you a lower interest rate.

The lowest interest rate financing you can generally get is a mortgage or secured credit line on your home. Your best choice is likely to combine all your debt into your mortgage. You may have to wait until it is due and you may need to ask to have your home reappraised to be able to increase your mortgage.

If your mortgage is not due for a long time, you could apply for a secured credit line on your home. It is also possible to get a ‘readvanceable mortgage,’ which is a secured credit line with a mortgage inside, and transfer your mortgage into it. A readvanceable mortgage has one combined limit for your mortgage and credit line, so that as your mortgage is paid down, you automatically gain credit in your credit line.

The next best is usually either an unsecured credit line. The interest rate should be about prime plus three per cent or four per cent, if your credit rating is decent. It is good to have one longer term to use in case of emergencies, as long as you have the discipline to not spend (it).

You could also apply for an ‘instalment loan,’ which should be a similar rate to an unsecured credit line. It normally has a five-year amortization, so the payment would be quite a bit higher. Ask for an ‘instalment loan,’ not a ‘consolidation loan.’ A consolidation loan on your record looks like you were unable to make your payments and can affect future borrowing ability.

A great wealth-building option can be to apply for a large RRSP loan and use the tax refund to pay off your other debts. This can be brilliant, if you have enough RRSP room and are in a high enough tax bracket.

Getting the lowest interest rate is generally the most important. You can try to keep your payment reasonable either by having longer amortizations for loans or your mortgage, or by having a credit line that is an interest-only payment.”

Ed