Put All Your Eggs in One Basket
April 2008 - Tammy Buss

In the fall of 2005, Manulife Bank conducted a survey of Canadian homeowners (through Maritz Research*) to find out if homeowners had ever applied the strategy of consolidation to managing their debts and, if not, Manulife wanted to understand why.
In addition, Manulife commissioned a study by Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, to investigate the financial advantages of Canadians consolidating their debt. Here’s what they learned:

Maritz Research Survey

• Over half of all Canadian homeowners polled had some form of household debt (i.e., mortgage, credit card, line of credit, etc.)
• A third of these people were just servicing their debts, that is, only making the required payments.
• Even though two-thirds of homeowners with debt indicated they had a plan in place to reduce their debts faster, two-thirds had never tried consolidating debt.
• Among those who hadn’t consolidated their debt (aside from those who felt their debt wasn’t large enough to consolidate), the top two reasons for not doing so were that they prefer to keep their debts separate and they saw no advantage to consolidating.
  Milevsky Study
• Canadians have a preference to keep their debts separate.
• This study coined this practice as “debt diversification” and determined there were two types: “space” diversification (spreading debts over different products, each with different terms and interest rates) and “time” diversification (not using their savings and income to pay down debts as quickly as possible).
• The study noted that debt diversification is harmful and recommends that Canadians:
  • Consolidate their debts at the lowest rate possible
  • Use short-term assets to reduce those debts with the
    option to borrow back when needed
  • Manage their debts in the most tax-effective manner possible (reducing their taxable interest earnings by paying down their non-deductible debt)

Using financial simulation techniques, the study calculated that the average Canadian homeowner could probably save money each year just by optimally managing their debts and short-term assets.

Conclusion
While the survey identified a problem, it also offered a solution. To save money, Canadians should consolidate their debts at one low interest rate in a line of credit and use their short-term assets – including their income – to pay down those debts.
For example, the Manulife One product offers access to up to 90 per cent of the value of your home (based on your individual circumstances) so you can easily consolidate most, if not all, of your debt into a single account. Then, because it operates as a line of credit, you can deposit your savings and chequing account balances, plus your income, into the account to pay down that debt – and take the money back out as you need it. The interest you can save is unbelievable.

I’ve been saying this all along, but it’s nice to have an example to back it up.

*The survey by Maritz Research, conducted Sept.15-21, 2005, of Canadian homeowners, has a margin of error of +/-2.73 per cent, 19 times out of 20. The number of Canadian homeowners surveyed was 1,261. Manulife One is offered through Manulife Bank of Canada. Manulife, Manulife One, the One logo and the block design are registered trademarks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Bank of Canada.