To help Canadians who are feeling the financial and emotional pressures of debt, we spoke with RBC Investment & Retirement Planner Marco Imbrogno and RBC Financial Planner Giselle Totino for their advice. Here’s what they had to say about managing debt through these challenging times.
Q: Are you speaking with clients about debt issues these days?
Both Imbrogno and Totino share that many clients are checking in with them to see if they’re going to be OK. Says Totino: “A lot of people have lost their jobs. Many are carrying a mortgage, line of credit, credit cards, a car loan… and they feel like they’re just paying debt and nothing else. People feel like they’re not getting ahead.”
Q: For those struggling with their debt, what is the first step people should take?
Taking stock of all outstanding debt is always an important first step, and recognizing the type of debt and the cost of carrying it will help prioritize repayments.
“To start, debt needs to be broken into two categories: Cash flow and borrowing costs,” says Imbrogno. Understanding where you’re allocating your money is as important as what the interest rates are on the various debts you’re carrying. Do you have credit card debt? Is it line of credit debt? Are you accelerating the payments on your mortgage debt? These questions all come into play to make sure you’re paying down the right debt as fast as possible.”
Keep in mind, there is both “good debt” (i.e. money you’ve borrowed to buy a house) and “bad debt” (i.e. money spent on credit cards that can’t be paid off) . Reducing the “bad debt” with the highest interest rate should be the first priority.
Q: What advice to you have for people who are trying to deal with their debt?
Consolidating higher interest rate debt into lower-rate options is one of the best moves when it comes to getting a handle on your debt. There are a few different ways to do this.
“With the real estate market the way it is in this country, many Canadians will have equity built up in their home,” says Totino. “And with mortgage interest rates being so low right now, it’s worth sitting down with a Mortgage Specialist to see if it makes sense to break a current mortgage, get into a lower interest rate, amortize over a longer term and consolidate debt. By doing so, there’s the real possibility of improving cash flow, reducing the cost of borrowing and creating a more manageable situation where there’s only one debt payment.”
She calls attention to the interest rates on non-mortgage debt, such as car loans (approximately 8%), lines of credit (approximately 5%) and credit cards (about 20%). “If you think about how much you’re paying in interest — considering mortgage rates today are about 2% — you could reduce your borrowing costs significantly.”
Imbrogno agrees with the consolidation approach, and offers other options for homeowners. “A refinance or secured line of credit are good options, depending on the type of repayment someone can make. If you’re in a short-term crunch, then short-term borrowing on a line of credit might make sense. If it’s a longer timeline, then refinancing an existing mortgage and extending the amortization may work best.”
For those without home equity, moving higher interest debt (i.e. a credit card) to a lower interest rate option (i.e. a line of credit) will reduce interest costs and enable you to pay down debt faster.
Q: Is downsizing a home a viable option?
While downsizing is an option, it’s important to consider all the costs and consequences that come with moving. “In order for downsizing to make sense, you need to make a significant change. Going from a $1 million home to a $750,000 home will only leave you with enough funds to last you a couple of years,” advises Imbrogno. Especially considering the costs that factor into buying and selling real estate.
Using the equity you’ve built in the home by refinancing, extending the amortization or opening a secured line of credit could deliver equal relief without having to move. Unless, of course, you’re truly ready for a change.
Q: Should you ever dip into retirement savings to pay off debt?
If you had savings set aside for a rainy day, using those funds for this downpour is a smart way to go. But using money earmarked for retirement may not be wise. “Before considering whether to take money of your investments, you need to look at what type of investments you have,” advises Imbrogno. “Do you have money in an RRSP or a Tax-Free Savings Account? What are the tax implications of withdrawing from your savings? These are important questions to consider.”
He adds that another problem with taking money out of investments to cover debt is that once withdrawn, there isn’t a high likelihood that it will be added back in. “It’s typically a one-way transaction,” he says.
Q: What is a common mistake people make in dealing with debt?
Both Totino and Imbrogno agree that not seeking professional advice is the most common misstep they see. “People can be embarrassed,” explains Totino. “And sometimes people go out and make choices that cost more money — such as going to a B lender or opening a payday loan — because they’re too ashamed to come to the bank.” She further explains that even if you have bad credit and don’t qualify for conventional banking products, advisors at RBC will work with trusted alternative lenders to get you on track.
Imbrogno further explains that many people may not remember they had previously set up an accelerated mortgage payment, or a regular contribution to an investment account, which could be paused while dealing with debt or a cash crunch. “If you don’t have someone to ask you these questions and really understand your whole financial picture, you may not know what your options are.”
Q: What would you say to someone who is feeling ashamed to talk about their debt?
“The worst thing you can do is not talk to somebody. Debt can weigh heavily on your mind and negative thoughts can percolate and really affect your health & well-being,” says Imbrogno. “And if there is judgement, you’re talking to the wrong person,” he adds frankly. “Our job, fundamentally, is to help people.”
“We’re all in this together,” adds Totino. “We just want to make it better for you. We know that life can catch up quickly — kids are expensive, costs can get out of hand, your furnace can break down, the unexpected can always happen. We are here to help you prepare for that unexpected. This isn’t about judgment — it’s about helping and providing the right advice.”
If you’re struggling with debt, the best move you can make is to check in with an advisor who can help you assess your situation, find ways to reduce and consolidate your debt and help you sleep better at night. RBC advisors are ready to help.
Check in with an RBC Advisor today.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.