Refinance your home to make up for an RESP shortfall?

Q: I am a 55 year old male with three kids who are in university and we have exhausted our RESP savings. Now I’m having a cash flow problem. The main issue is that the interest rate on the mortgage is so high—as I am a self-employed clinical psychologist who works out of my home (and my wife works for me).

The dilemma we face is whether or not we should sell our house and downsize into something a little cheaper, liquidate some RRSP savings or find another solution. I earn $200,000 each year and know that once the university days are over, we’ll have a lot more money. What should we do?

— David Rynard, Kingston, Ont.

Robert McLister, mortgage planner at intelliMortgage and founder of RateSpy:

A: This puzzle has a few missing pieces: two being your mortgage balance and interest rate.

What we know is that the highest 5-year mortgage rate over the last five years was about 3.99%. That assumes you were reasonably qualified at the time you got approved.

Assuming a $600,000 mortgage, for example, the payment difference between 3.99% and today’s rates is about $450 a month. If that’s causing you grief on a $200,000 income then you’re probably living beyond your means.

If you got a “non-prime” mortgage and your rate is higher than 4.00%, that’s all the more reason to restructure your debt. Find a mortgage advisor poste haste and ask this person to create a refinance plan to improve your cash flow.

Barring that, and assuming you have no other non-registered assets to sell, downsizing and/or renting isn’t exactly the worst fate in a seller’s market. Using up your retirement safety net is a last last last resort. Even refinancing into a HELOC with lower interest-only payments is usually a better alternative.

Ultimately, your kids may need to find a way to chip in more for their education, to avoid risking their parent’s retirement.

Robert McLister is a mortgage planner at intelliMortgage and founder of RateSpy.

Steve Garganis, mortgage broker and editor of CanadaMortgageNews.ca:

A: It would be helpful to know what the mortgage balance is, the maturity or renewal date, which bank holds the mortgage, how much the house is worth, what the current payment is and how much more you expect to pay for in university expenses.

But, for the sake of providing a logical answer, let’s assume you have a $300,000 mortgage on a house worth $700,000. You could opt to refinance, thereby eliminating the current high interest mortgage and locking in to the lower rates offered these days. Keep in mind there are several mortgage products available specifically for self-employed individuals with fully discounted interest rates. You could also increase your mortgage, which would provide you with more money with which to take care of the university expenses. There may even be options to do this, but keep your current payment mortgage payments the same.

Downsizing is also possible. While this is not a bad option, as it could provide some much needed liquidity, it does mean the process of selling, buying and moving. However, if the plan is to eventually sell, then, maybe now is the time.

Steve Garganis is a mortgage broker at Mortgage Intelligence and editor of CanadaMortgageNews.ca.

Nawar Naji, mortgage broker with Mortgage Architects:

A: There are three solutions that come to mind:

Restructure your mortgage to a lower cost of borrowing, pull some equity from your house, if available, which will provide you with a buffer for the next few years until the kids are through university.
If restructuring the mortgage is not a viable option, set up a secured line of credit. This should allow you to meet your university expenses and allow you to weather business cash ebb and flows.
Selling the house should be the last option. If you have adequate equity then the first option is optimal.

Nawar Naji is a licensed mortgage broker with Mortgage Architects in Toronto, Ontario. He has been brokering since 2007, helping clients finance homes and investment properties.