#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« on: March 20, 2014, 12:36:22 PM »
Ever get presented with what seems to be a simple math problem that you just can't seem to solve to your satisfaction?

Here's a quick background, and then my math problem/question
I currently have \$15k in student loans in deferment (0% interest) which will go into repayment in 2 year at 6.55% fixed (note: it is currently accruing NO interest).
I also have \$15,000USD in a MMA earning a pitiful 0.5% APY earmarked to pay off aforementioned loans in 2016.
In Canada, I have a mortgage with \$191k remaining in \$CAD.  I have 4 years left on my term at 3.04%.  After those four years my rate will reset.  I'm anticipating the rate will go up (since 3.04% was very close to the historic low).  Currently I have about 19 years left at my current repayment rate.
Not that it matters, but when I purchased the house I used USD savings for the down payment, and the conversion rate was 1:1.

Here's my math problem/dilemma.  I have a mortgage in CAD\$ at a low rate (3.04%) that I am paying off now, and a student loan in USD\$ with a higher rate (6.55%) that I will have to start paying off in 2016.   I have enough to pay off the student loan in full when it comes due, or put it towards the mortgage now.  Normally this would be dirt simple; pay off the highest interest rate first.
The math problem is the conversion rate.  In Dec 2012 the \$USD=\$CAD.  Now it's 1.13 in the \$USD's favor.  In otherwords,  the \$15kUSD would pay off \$16,950CAD worth of mortgage principle.

the question:  at what point (if any) does it make more sense to convert those funds to CAD and pay off more of my mortgage than save them for the intended student loans?

on the face of it i'd save \$14,245 in interest over ~20 years in \$CAD if I paid down the mortgage, vs \$5,484 in USD in interest on a 10 year note if I paid off the student loans.  But if/when I try to factor in an anticipated rate hike in 2018 or factor in the added savings I'd have from not having a student loan payment my calculations all go to pot.  Monthly SL payments would be \$170.  Mortgage payments would remain the same, I'd just finish sooner and have 24 fewer payments.  I'm also sure that if I kept the SL debt I would attack it like a "hair-on-fire" emergency and pay it off in 2-3 years instead of the full 10 by diverting my usual monthly savings at it.

A few things that matter
1) This money is in addition to my emergency stash, and separate from my retirement and long-term savings.
2) I have no problem paying my mortgage (I'm actually paying a bit more than the minimum each month, but more goes into LT savings).
3) It unknown whether my income in two years will come fro the US or Canada when the student loans come due.  I certainly could pay them off by selling long-term investments, but I'm loathe to do so right now with a 0% interest rate. At 6.55% I'd be more motivated (or I could certainly afford to make the monthly payments).
4) I think it a fool's errand to try to predict where currencies will go in the months ahead, but I want to have a plan.  For example, if the CAD\$ falls to xx% I will convert and use the funds to pay off some of the mortgage.
5) Yes, I've thought about the small loss from conversion.  Banking with TD allows you to convert funds and pay a very small float.

#### Prairie Stash

• Handlebar Stache
• Posts: 1795
« Reply #1 on: March 20, 2014, 02:00:32 PM »
your essentially asking when to sell stock (a stock of USD). I can't predict the relative rates, now or in 3 years, good luck.

I see the scenario differently.  If rates remain constant you're out \$1030 in preventable interest over 2 years (this number decreases every month).  Being mustachian, you can probably pay off the USD loan at any time, once due. If rates stayed constant you can always tap a HELOC to pay off the loan in 2 years, springy debt.

After year 2 you pay 6.55-3.04%=3.51% more on the loan then the mortgage. At that point stop any extra on the mortgage and pay off the loan.  If you're limited on cash flow and take a long time you'll end up paying more on interest, then if you had just left the money there all along.

Also being CDN, your rate might jump on the mortgage upon renewal, just to complicate things.

#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« Reply #2 on: March 20, 2014, 02:42:27 PM »
your essentially asking when to sell stock (a stock of USD). I can't predict the relative rates, now or in 3 years, good luck.

not.... exactly.  At least not how I am viewing it.  I'm not very interested in when to "sell the stock"; I'm more interested in which debt to put the funds towards.  True, the rates will constantly change, but I'm not trying to predict that.  Instead, i'm trying to find out at what point it makes more sense to apply it to the mortgage than to its intended use for the SL.

Look at it one way,
if the exchange was even (\$1USD = \$1CAD) then it would be a no-brainer; pay off the SL.
If the CAD tanked down to 0.50 (extremely unlikely), it would also be a no brainer; use it towards the mortgage
what i'm trying to find is where that balance point is.
our income is currently in CAD, so shifting exchange rates won't effect our purchasing parity relative to our mortgage.

I agree that having a Canadian mortgage adds uncertainty.  In most of my scenarios I'm expecting a new rate of anywhere from 4% to 5%. That also makes using the funds to pay down the mortgage more attractive.

For some reason I hadn't thought of using a HELOC (I have one at 3.25%, but have never used it) to pay off the SL, and then payback the HELOC in ~2 years.  That adds yet more complication to my model.

#### TrMama

• Guest
« Reply #3 on: March 20, 2014, 03:46:50 PM »
I'm no investment expert, but a similar scenario triggered me to sell off my US investment and refocus my investment dollars on my RSP. The currency fluctuation was the nail in the coffin of "this is getting too damn complicated for the amount of \$ involved."

In your shoes, I'd likely cash out the MM fund now and pay off the student loan, just so I could simplify my life.

Another option is to invest the \$15K in something that will earn you a better rate of return over the next couple years and then use that money to pay off the student loan.

#### daverobev

• Magnum Stache
• Posts: 3781
• Location: France
« Reply #4 on: March 20, 2014, 05:23:10 PM »
Pay the student loans off. You have to convert the cost of the debt to CAD\$ *back* as well. It could go to 0.65USD:1CAD, it could go back to 1:1 (if you think of commodities/raw materials, it might well be a 10-12 year cycle; if the peak was 2007, it actually won't be long til it comes back round again).

But the question is risk. If the numbers all go wrong, you'll be kicking yourself. Bird in the hand and all that.

Keep the money for the 2 years at the highest interest rate you can get, and then just pay it all back.

#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« Reply #5 on: March 20, 2014, 06:22:16 PM »
Pay the student loans off....
But the question is risk. If the numbers all go wrong, you'll be kicking yourself. Bird in the hand and all that.

Keep the money for the 2 years at the highest interest rate you can get, and then just pay it all back.
This is probably what I'll wind up doing.  I'm beginning to think I'm being lured by a sirens call, trying to find a value play where there's really just uncertainty (read: risk). It's just so damn tempting to think that every \$1,000 in savings I have could reduce my mortgage by 1,130.
Quote
"this is getting too damn complicated for the amount of \$ involved."
TrMama: That statement explains exactly how I feel.  I'm going to hold onto the funds for 2 years, then pay off the SL the month before they exit deferment. In the meantime I'll just continue to build my 'stache, and if my rates go up substantially when my term on my mortgage renews (2018) I'll unload both barrels on that debt.

#### Latito

• Posts: 17
« Reply #6 on: March 20, 2014, 06:26:46 PM »
The actual exchange rate does not matter one bit.  All that matters is the difference between the exchange rate now and the exchange rate 2 years from now when the SL is due.  Consider that if you were to cover the 15k USD into CAD now and put it towards your mortgage you would save roughly \$1030 in interest over the next 2 years.  At that time you would then need to get a loan presumably in CAD (a HELOC is the most likely way).  You do this because you'll be getting a rate below the SL's 6.55%.  The amount you would need to get as a loan would be 15k * [Exchange rate in 2016].

Since you would be converting the \$15k USD into \$16,950 CAD today and then saving an additional \$1030 in interest we'll set the break-even point at \$17980 CAD.  If you have to borrow ~18k CAD or more to cover the 15k USD SL, you made a bad choice by converting the money today.  For that to happen the exchange rate would need to be basically 1 USD = 1.20 CAD (or 1 CAD = 0.83 USD).

So basically the question is this: do you think the CAD will be above or below \$0.83 USD when your loan comes due?

Note: you should factor in the small bit of interest you are getting in the states now and the hassle this would cause.  I'd set the break even probably closer to \$0.85 personally.

#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« Reply #7 on: March 20, 2014, 07:55:19 PM »
At that time you would then need to get a loan presumably in CAD (a HELOC is the most likely way).  You do this because you'll be getting a rate below the SL's 6.55%.  The amount you would need to get as a loan would be 15k * [Exchange rate in 2016].

I could use a HELOC to pay off the SL, but I think I'm just as likely to either use earned income (I have some US income, but currently it all goes toward funding my IRA), or I could potentially use cash reserves.  Either way, I wouldn't necessarily need to convert funds back from CAD to USD to pay off that debt.
That said I'm increasingly leaning towards just using the funds in 2 years to pay of the SL, as originally intended.

#### daverobev

• Magnum Stache
• Posts: 3781
• Location: France
« Reply #8 on: March 21, 2014, 07:20:37 AM »
The actual exchange rate does not matter one bit.  All that matters is the difference between the exchange rate now and the exchange rate 2 years from now when the SL is due.  Consider that if you were to cover the 15k USD into CAD now and put it towards your mortgage you would save roughly \$1030 in interest over the next 2 years.  At that time you would then need to get a loan presumably in CAD (a HELOC is the most likely way).  You do this because you'll be getting a rate below the SL's 6.55%.  The amount you would need to get as a loan would be 15k * [Exchange rate in 2016].

Since you would be converting the \$15k USD into \$16,950 CAD today and then saving an additional \$1030 in interest we'll set the break-even point at \$17980 CAD.  If you have to borrow ~18k CAD or more to cover the 15k USD SL, you made a bad choice by converting the money today.  For that to happen the exchange rate would need to be basically 1 USD = 1.20 CAD (or 1 CAD = 0.83 USD).

So basically the question is this: do you think the CAD will be above or below \$0.83 USD when your loan comes due?

Note: you should factor in the small bit of interest you are getting in the states now and the hassle this would cause.  I'd set the break even probably closer to \$0.85 personally.

Plus between 2 and 5% bank/currency exchange fees, plus reporting money made on the currency conversion, if any. Not worth it, IMHO.

#### daverobev

• Magnum Stache
• Posts: 3781
• Location: France
« Reply #9 on: March 21, 2014, 07:22:29 AM »
OTOH: Use the money to buy a low end rental. If you can get 10% net on a \$40k property, 6.55% is a win :)

#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« Reply #10 on: March 21, 2014, 07:36:51 AM »
Plus between 2 and 5% bank/currency exchange fees, plus reporting money made on the currency conversion, if any. Not worth it, IMHO.
Currency exchange isn't much of a concern here; as I stated in the OP (#5) I can transfer money for <1% through TD.  I've had to do this many times and I'm always impressed with how low the float is (difference between the exchange rate and what I wind up getting).  As a US Citizen living in a foreign country I get an exemption of ~\$90k for income earned in another country, which I haven't come anywhere close to hitting. I file taxes in both countries regardless.
Interesting suggestion about looking for a rental.  Not sure that's in the cards for me just yet; even if I could find a \$40k rental (unlikely in my metropolitan area) I'd only be able to bring ~\$16k to the table as a down payment.  That would leave me with three loans every month (SL, primary mortgage nad rental mortgage).  One of my primary economic goals right now is reducing my debts.  IN 5-10 years I may revisit purchasing a rental.

#### daverobev

• Magnum Stache
• Posts: 3781
• Location: France
« Reply #11 on: March 21, 2014, 09:11:33 AM »
Plus between 2 and 5% bank/currency exchange fees, plus reporting money made on the currency conversion, if any. Not worth it, IMHO.
Currency exchange isn't much of a concern here; as I stated in the OP (#5) I can transfer money for <1% through TD.  I've had to do this many times and I'm always impressed with how low the float is (difference between the exchange rate and what I wind up getting).  As a US Citizen living in a foreign country I get an exemption of ~\$90k for income earned in another country, which I haven't come anywhere close to hitting. I file taxes in both countries regardless.
Interesting suggestion about looking for a rental.  Not sure that's in the cards for me just yet; even if I could find a \$40k rental (unlikely in my metropolitan area) I'd only be able to bring ~\$16k to the table as a down payment.  That would leave me with three loans every month (SL, primary mortgage nad rental mortgage).  One of my primary economic goals right now is reducing my debts.  IN 5-10 years I may revisit purchasing a rental.

<1% x 2. Remember, you're talking about a grand total of 3% difference for a couple of years, so ~ 1.5% is maybe 1/4 of that total!

#### nereo

• Senior Mustachian
• Posts: 16547
• Location: Just south of Canada
« Reply #12 on: March 21, 2014, 09:35:46 AM »
<1% x 2. Remember, you're talking about a grand total of 3% difference for a couple of years, so ~ 1.5% is maybe 1/4 of that total!
I don't understand where you are getting the "x2", or "3% difference".  I can transfer funds for less than 1%.  If I transfered the \$15k it would immediately be used to pay down a portion of my mortgage, thereby saving me accrued interest in the long term. There wouldn't be any conversion back to USD. It's possible in time we might sell our home here and move back to the US, but that would be years into the future and is far from certain.   As it is we have funds on both sides of the border, and will are likely to continue this practice.

#### daverobev

• Magnum Stache
• Posts: 3781
• Location: France
« Reply #13 on: March 21, 2014, 10:45:16 AM »
<1% x 2. Remember, you're talking about a grand total of 3% difference for a couple of years, so ~ 1.5% is maybe 1/4 of that total!
I don't understand where you are getting the "x2", or "3% difference".  I can transfer funds for less than 1%.  If I transfered the \$15k it would immediately be used to pay down a portion of my mortgage, thereby saving me accrued interest in the long term. There wouldn't be any conversion back to USD. It's possible in time we might sell our home here and move back to the US, but that would be years into the future and is far from certain.   As it is we have funds on both sides of the border, and will are likely to continue this practice.

Ok, sorry, I've lost the thread somewhere - how would you pay back the loans in 2 years then?

3% difference is your mortgage rate vs your student loan rate, when it kicks in.

#### nereo

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• Location: Just south of Canada