A couple I recently met with had a challenge I’m sure you can relate to.
Being in their later 50s, John and Candice had a home renovation mortgage coming up for renewal and their historically low interest rate was set to more than double. That’s a meaningful hit to anyone’s cash flow (especially for doctors who tend to be in a high personal tax rate already!).
“We’ve been offered a 5-year fixed rate of 3.99%” John told me. “So, we’re going to have to take on a little bit more it looks like.”
Candice jumped in. “This is an additional $500 per month in interest charges. An extra $6,000 a year. I’m not too happy about it.”
Ouch.
Could they afford it? Yes. Was there a better way to look at the problem? Absolutely.
I thought about it for a moment before responding.
“Would you be open to a more creative way to approach paying off your debt by changing the timing and amount you pay?” I asked.
“Sure!” John said with a smile, his interest piqued. “Do tell!” said Candice.
It Pays To Look At Your Debt From Another Angle
“If we transferred your mortgage to your secured line of credit, we could pay interest only for the next 7 years until you turn 65 while you’re at a high tax bracket, and save the difference in your Prof Corp until we can income split between the two of you at a lower overall tax rate,” I added.
“Not only that, but with your personal savings we could make your line of credit interest tax-deductible. With your high tax rate, the deduction would almost fully fund both of your TFSAs.”
“Would you be open to a more creative way to approach paying off your debt
by changing the timing and amount you pay?”
Their eyes widened and they grinned at each other.
“Are you some kind of wizard, Adrian?” asked Candice. We all laughed and they took a moment to process my suggestion.
I brought out my trusty calculator and exercised my finance-nerd powers to crunch some numbers to see how they’d be ahead at age 65.
Being creative would give a pretty big impact.
At age 65:
1) An extra $100,000 in combined TFSA savings from deducting their interest.
2) Extra savings in John’s Prof Corp of almost $450,000 – the same amount as their mortgage.
3) Paying off their mortgage in 5 years yet with a household income tax 10% lower, saving them thousands more every year.
Turn A Problem Into An Opportunity
Financial planning isn’t just about rates or amortizations, it’s about timing and coordination.
By looking at the problem a different way, you can turn a problem into an opportunity. (I think Einstein said this first!)
Maybe you’ll like this kind of creative planning, or maybe you’ll just want to pay the way you are now.
But isn’t it better to make the choice yours, rather than the bank’s?
Enjoyed this article? I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And make sure to check out my Amazon bestseller, The Doctor’s Handbook: 5 principles of wealth you weren’t taught in med school.
