The coronavirus disease (COVID-19) pandemic is touching every aspect of our lives and changing how we prioritize our resources. Many Canadians are feeling enormous financial pressure from job losses or reduced income, while carrying significant levels of debt.
Physicians, especially those early in practice, tend to have large debt loads incurred while training, and some are heavily affected by a reduction in income.
If you are trying to figure out how to prioritize your debt during this time, follow the general rule of thumb of paying your highest-interest debts first and those that charge no interest (or fees) last. Here is an overview of how to prioritize these debts:
Start with your credit cards
A tenet of financial planning is to pay down your most expensive debt first. Credit cards typically charge higher interest rates than other forms of loans — in Canada, usually around 20%. In early April, the six big banks announced they would cut credit card interest rates for customers experiencing financial hardship because of the COVID-19 pandemic. But even at 10% or 11%, credit card debt is still expensive. If you can’t pay off your credit cards in full, use your line of credit to pay them off, to reduce the interest you’ll pay.
Try your best to keep up with your mortgage payments. If you can’t, check with your financial institution about deferring your mortgage payments. During the deferral period, interest will continue to accrue, so your payments will be slightly higher after the deferral period ends. You will pay more interest over the life of your mortgage, but a deferral will help with your short-term cash flow.
Line of credit
With three interest rate cuts from the Bank of Canada in March 2020, the banks have dropped their prime rate from 3.95% to 2.45%. The interest rate on your line of credit should have declined by 1.5%. If you can’t pay the interest on your line of credit, check with your financial institution for deferral. Remember that interest will continue to accrue on the amount you borrow.
Canada Student Loans
There is an automatic pause on Canada Student Loan payments from March 30 until September 30 this year. Interest won’t accrue during this period, so you won’t need to think about paying back the federal portion of your student loans for a while. Check to see if your province is deferring student loan payments.
Your personal income tax return is now due June 1 (instead of April 30), and any taxes owing are due September 1, 2020. Your quarterly tax instalments won’t need to be paid until September 1 either. No interest or penalties will accumulate on these amounts.
Also, some municipalities have allowed property tax payments to be deferred with no fees or interest. Since these deferrals come at no cost, you don’t need to pay your property tax until the new due date.
It is hard to predict how long this situation will last. If you have any questions about your debt payment options, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.