This is where your finance takes place

The very first thing I was happy with was the fact that my property increased in value and was now at 275K. That is bringing my net worth a little bit over 39K. With a little help of my bonus, I will finish the year 2007 slightly over 40K. If you recall from my first post about restructuring my debts, I had monthly obligations of $1,915. With the new HELOC, I will have a minimum payment of $780 a months if I was to decide to pay interest only (I pay only 4,25% on my HELOC). However, I decided to make a monthly payment of $1,500. Therefore, I would decrease my monthly payment by $415, not bad huh?

Unfortunately, the whole $415 will not be applicable on my $1,500 project. As I previously mentioned, I quit my second job in July but I never replaced this income. Therefore, I will have to come back with additional calculation in regards to my project. The good news is that I know that it will still decrease my overall payment and definitely enable me to increase my saving capacity.

Starting in January, I will be able to put back my original monthly investment with my Smith Manoeuvre, About two months ago, I had to decrease my investment in order to increase my available cash flow. I dropped it down to $400 even thought I did not like the idea of getting late in my parents loan repayment schedule. By investing $600 on a monthly basis, I am assured to be able to pay at least the 25K in capital back in three years. In regards to the interest, I would just have to continue paying them back for another year in the very worst case scenario.

In the best scenario ever, The Bank of Canada will decrease their rate (I heard rumours that it might happen shortly!) and prime rate would drop to 6%. This mean that I will pay only $733 in interest and that I will be able to increase my Smith Manoeuvre payment up to $700. This would definitely facilitate my loan repayment and I would only have a mortgage and a very cheap line of credit left at the age of 30 (Hum… this will be time for a BMW then ;-D). I told you, I am not very frugal

I am well aware that I will be paying more interest over time with this technique. However, I give more importance to my present lifestyle than my future interest payment. I see personal finance more on a cash flow management perception than an absolute way to create wealth. If I can manage to have my wife stay at home next year, I will surely be more happy than if I save a couple of thousand dollars in interest charges!

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You have to make a decision in regards to this manner. I picked the lifestyle

The process

Consolidating your debts through your property is fairly easy. The first thing to do is to meet with your banker to know if you qualify of not for a bigger amount. As you are already owing this amounts in debts, chances are that the bank will grant the increase on your exiting mortgage conditional of paying most of your debts. By doing so, you will take debts that are usually set over 5 years or less and amortize them over 25 years. Your monthly payments could decrease significantly depending on the amount of debt outstanding.

In my case, the bank requested a recent appraisal of my property as I was requesting 80% of the value as a HELOC. The appraiser came and did the report. I was a bit disappointed with the value we got (I was expecting about 5-7K more) but it was more than enough to do my plan. In only one year and without any modification to my property, it gained 4,5%. My house is now at 275K, making my net worth jumps a little bit over 39K. It is even better considering that I paid 255K last year (even though the appraisal showed 263K). Therefore, I made 7,8% on my house this year.

But the most important part is that I was able to increase my HELOC from 192K to 220 and liberate an additional 28K from the equity in my house. To my opinion, the equity lying in your house is the equivalent of pilling up money in a safe in your basement. You earn no interest and you can’t do anything with it. I think you are better off using the maximum equity from your house for other project.

With this 28K, I will do two things. The first one is that I will pay off my heavy 25K loan at the bank with a monthly payment of $650. When I contracted this loan, it was for 32K and I was working two jobs. I was using the income from my side line to pay off this loan. Now that I quit my second job in July, I do not have this extra cash flow to pay off this loan. This is why I will include it in my HELOC.

I was paying 6,25% on the personal loan and I will drop it to 4,25% once it will be within my HELOC. I would have the opportunity to create a sub-account in order to keep track of this loan separately but I need to amortize it over 25 years in order to reduce my monthly cash flow. With the remaining 3K, I will do something else but it is beyond the scope of this post. I’ll tell you in January!

Stay tuned as tomorrow, I will reassess my situation and show how I decrease my cash flow by using my property to pay off my other debts.

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The facts

Here’s a quick peak of my financial situation prior to restructuring my debts and increase my HELOC:

The liabilities:

- Personal loan 25K with payment of $650

- Personal line of credit of 20K with a balance of 18K (I am paying 3,25% on this one, so I only pay $65 a month)

- HELOC of 192K with a balance of 190K (remember, I am doing a Smith Manoeuvre) with a monthly payment of $1,200

- Loan from parents of 25K, not payments required yet (agreement to pay in full in three years with an interest rate of 4,8%)

- Total debts: 260K (I do not have credit cards balance as I pay them in full on a monthly basis). for a monthly payment of $1,915.

The assets:

- Bank account : 1K

- Smith Manoeuvre investment account: 4,7K

- Stocks: 1,5K

- RRSP (mine): 6K

- RRSP (Wife): 2K

- Car: 9K

- House: 263K (last year’s appraisal value)

- Total assets: 287,2K

- Net Worth : 27,2K

While my net worth is not very impressive (I am actually not very happy about it!), when you put it in perspective of my age (26), I think it is not too bad. My goal is to use my SM investment account to pay back my parents in 3 years. I borrowed 25K from them 2 years ago. Therefore, it is a 25K loan over 5 years at 4,80%. In 3 years, I will owe them 31K with interest.

As I want to keep up with my $1,500 project I need to increase my cash flow. The interest rate I pay on my debts are all minimal since I am working for a bank. I will leave my line of credit as is since I pay only 3,25% on it. My second best interest rate is my HELOC with 4,25% (Prime rate - 2). This is why I decided to have a second appraisal done on my property to pay off some debts. We will see the result tomorrow.

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