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.