Adrian Mastracci, wealth manager with KCM Wealth Management says, "Clearly, incurring non-deductible loan interest is very costly, even in a low tax bracket."

Vancouver, B.C. (November 28, 2001): Several welcomed changes have taken place in the 2001 world of loan interest rates payable.

Adrian Mastracci, fee-only investment counsel and wealth manager with Vancouver based KCM Wealth Management comments, "In particular, all categories of loan interest rates have been significantly reduced in 2001, with the notable exception of credit card rates. Thanks to monetary policy, this poses a wonderful problem for borrowers."

"Those who take advantage of the lower rates will have a little more cash leftover after each payment," says Mastracci, "Therefore, it's appropriate to review borrowing strategies to take advantage of the current times."

Mastracci continues, "As an example, the prime loan rate charged by chartered banks has dropped from 7.5% in January 2001 to 4.0% in November 2001."

"Whenever possible, borrowers are better off to incur interest costs which are deductible for tax purposes," noted Mastracci, "And to pay off non-deductible loans as quickly as possible."

Mastracci illustrates the impact of loan rates with the following table. It outlines the effective costs of a typical 6% loan rate, for both deductible and non-deductible interest, calculated for three marginal tax rates (MTR):

"Clearly, incurring non-deductible loan interest is very costly," said Mastracci, "Even in a low MTR."

Mastracci offers these suggestions to assist borrowing strategy:

• Try your best not to get in over your head with debt, especially credit card debt.
• Incurring debts beyond your comfort zone is one of the easiest ways to dig yourself into a never-ending stream of loan payments. Perhaps, even flirting with financial ruin.
• This is the time of the year where considerable consumer debt is incurred, often resulting in credit cards creeping way past their safe limits. We are all aware of the dreaded January moment of reconciliation, so be careful of the implications for you.
• Establish an allocation for the merry season and try your best to stay within your guidelines.
• Perhaps your personal stocks or mutual funds (not the RRSP/RRIF) contain one or more of yesterday's winners. If so, it may be time to take the medicine, sell and use the cash for your expenditures.
• If there is money left over from a stock or fund sale, pay off the highest interest rate loans first.
• If you have credit card debts, consider transferring the balances to a line of credit. Typically, the credit card interest rate is around 18%, whereas a line of credit rate is likely under 6%.
• Say the credit card debt is $5,000, the interest savings can approximate $600 per year when transferred to a line of credit.
• If your interest payments are not deductible for tax purposes, review your situation with an investment advisor to determine what can be done to achieve at least some deductibility.
• Let's illustrate the implications at the 45% tax rate. A loan interest rate of 6% will cost you about 10.9% if it's not deductible, or 3.3% if it's deductible. That's a significant spread to pass up.
• But are you sitting down? A non-deductible 18% credit card rate really costs about 32.7% in the 45% MTR. Ouch!
• Don't get drawn into making the minimum payment on your credit cards. At rates in the 18% ballpark, it will take forever to pay off the outstanding balances.
• Discipline yourself to minimize the use of the high rate credit, such as credit cards. If you switch to a lower cost loan, only you can resist the temptation to run up the cards again.
• Determine If it makes economic sense to refinance your mortgage, car loan and consumer loan to the lower interest rates that we enjoy today. Some interest penalty may apply.
• Make sure that you consider your goals in selecting the appropriate term and loan rate suitable for you.
• If refinancing your mortgage is not a viable option, read the "prepayment clause" in your mortgage document. It may allow an additional 10% to 20% per year towards the reduction of principal, or the doubling up of the normal monthly payment without incurring an interest penalty.
• Obtain an amortization schedule for your mortgage along with some "what if" scenarios, such as how to pay it off in one-half the time. You will be absolutely amazed at the amount of interest you will save by paying your mortgage in half the regular time.
• Hence, if cashflow permits, reduce the mortgage amortization from the standard 25 years to the 10 to 15 year area. You'll save a bundle of interest.
• It's always a splendid day when the last mortgage payment is made. Just ask anyone who has gone before you.
• Don't take no for an answer. Shop around if your institution is not receptive to your needs. Don't be afraid to ask for lower rates than those you see posted.
• Where possible, allocate interest cost savings to the repayment of non-deductible debt or the emergency fund.

"The wise and responsible use of available credit, especially during these times of merry, is vitally important for your financial health," summarizes Mastracci, "Resolve to improve your situation by avoiding the common pitfalls of borrowing money. Make this your gift to you!"

"In this season of merry, I'm reminded of one of my favourite commercials of a father and son conversation: just because you have cheques in your chequebook… doesn't mean that…," says Mastracci, "Well, you know the rest."

"Ultimately, only you can set the boundaries suitable for your circumstances," concludes Mastracci, "Use your good judgement, formulate your borrowing strategy and stay out of financial trouble this merry season."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.