Reduce your holiday debt

Happy New Year! As we enter this new decade, do you have some spending regret?  You promised to stick to a budget; you promised to scale down and have an old-school, back-to-basics, holiday. But some items were just too hard to resist.

Well, you’re not alone. Holiday spending has been ticking up over the past few years, according to a report from PWC Canada. While the 2019 numbers aren’t out yet, PWC predicted that holiday spending would be up 1.9% to an average of CA$1,593. Why? Canadians’ confidence in the economy and their own personal finances is up. And while a quarter of Canadians planned to spend more than they did in 2018, it’s younger shoppers who are leading the charge, with 42% of Gen Z and 35% of millennials bringing more joy to their world.

Every holiday season, many consumers reach their debt limit. And January is when there is a rise in bankruptcy filings and consumer proposals.

What can you do?

Here are a few tips to help get rid of that extra debt quickly.

Create a budget
Know where you’re at financially and start wherever you are. If you’re unsure of where to start, try a budgeting app. Once you know what you earn and what you spend each month -- it helps to see those numbers written out and itemized -- any monies left over can be used to pay off debt.  See what bills have high-interest rates, and pay those off first.

Change spending habits in the short-term
Put away the credit cards. Pay at least the minimum amount owed to avoid extra fees, but if you can, pay extra to get that debt down faster. Look at your other expenses and see where you can trim.  You can review your grocery budget; cancel subscriptions and/or put memberships on hold.

Find, or negotiate, a lower interest rate
Credit card interest rates can be notoriously high. Sometimes, if your payments have been current, creditors may be willing to reduce the rate if you simply ask. Your card company wants to keep your business, after all, and now is when competitors unleash their most attractive balance-transfer campaigns.

Get a game plan to pay off multiple cards/debts
If you’re still stuck with high-interest cards, list them in order of rates, highest to lowest. A reasonable approach is to attack the highest-interest cards first (making sure you pay the minimum on the other cards) and work your way down.

Consolidate debt
This doesn’t actually reduce debt but it can make monthly payments easier and if the loan has a lower interest rate than a credit card, then you’ll save dollars in the long run.  If you own a home, consider speaking with a mortgage professional for a way to consolidate debt.

Refinance Your Mortgage
Mortgage rates are lower than consolidation loans and the increase can be amortized over the life of the mortgage. If you think refinancing may work for you, contact your mortgage professional and review all your current debts.

Use your holiday bonus
If you got one, consider using it toward paying off debt rather than spending it on a vacation or other luxury purchases. I know, you worked hard to get it, but you’ll be less stressed in the long run.

Life insurance loan  
If you’ve been paying into a life insurance policy that has built up a cash value, check to see how much is available to you. You won’t be cancelling your policy but companies may let you borrow the cash that’s been accumulated.

Don’t despair, there is usually a  solution for everything.



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Stressing over the debt-to-income ratio? Don’t!

The debt-to-income ratio has hit the headlines again.  This time the ratio rose to 167.3 % in the fourth quarter of 2016 compared to 166.8% in the third quarter. That means for every dollar of disposable income, consumers owe $1.67.

This increase has been fuelled by mortgages and low-interest rates, which has some policy-makers getting antsy.  They’re concerned at what could happen if rates rise. Yet consumers have been able to pay their debt relatively easily. And low interest rates have allowed consumers to pay down more of their mortgage principal, with payments split almost evenly between interest and principal in the fourth quarter.

Benjamin Tal, Deputy Chief Economist for CIBC, isn’t having it and is calling an end to the debt-to-income ratio. In his weekly Market Insight he calls the ratio the most quoted number and the most useless economic indicator. The main reason is what the number is assessing versus what it doesn’t assess.

For example, it’s unlikely that consumers will pay off their mortgage in a year, yet the total debt amount is factored into the debt-to-income ratio.  Mortgage debt accounts for 65.5% of ratio.  The ratio also looks only at the debt of consumers who already have debt rather than the income of people with and without debt.  Perhaps not a totally accurate picture, then.

According to Tal, in a “normally functioning economy, debt will rise faster than income.”  The ratio is designed to rise and has only fallen twice in the past 25 years. 

Tal also pokes holes at the pace of increasing debt. Here are the numbers:

• Total real household debt is now rising by just over 4%, in line with the recovery of the 1990s
• Consumer credit is  rising by only 2.5%, slowest pace over the past 30 years (non-recessionary)
• Mortgage credit rising by 5.2%, which is low
• Household incomes rising at 2.5%, the long-term average
• Seems pretty normal.

TD Bank economist Diana Petramala wrote “Debt growth has accelerated somewhat, but it is not growing at the double-digit pace that would typically be considered dangerous.”

Equifax has reported that 46% of consumers were decreasing their debt.

So, Tal is pretty clear when talking about debt -- make sure to say something about what’s included in that debt. The simple catch-all number may be too simple for a complex story.

If you are carrying high interest debt and want to talk about opportunities to consolidate by refinancing, speak with a mortgage broker.

Canadians seem to love debt

Canadians have a growing love affair with debt. Household debt hit a new record in August as consumer spending jumped 2.3 % in the second quarter of the year, despite the fact that we are also in a recession, “technically” speaking.

So where is this debt coming from? Well, we’re buying houses, cars, furniture and clothing. Household credit is rising its fastest since 2012 – 80% of that is due to an increase in mortgage debt. In 2013, the pace of credit growth was 2% -- it’s now rising to just under 3%.

Retail sales has had its best start to the year in the past decade. Credit-card spending has gone up by 8% this year; spending on restaurants and fast food is up more than 12%. And we’re pouring more money into home improvements. Spending on home improvements has increased by 10% in the second quarter of the year.

So why is this happening? Being employed helps. The unemployment rate is holding steady at about 6.9%. Low borrowing costs also helps. The Bank of Canada rate is .50% and mortgages, both variable and fixed are at historical lows. In fact, consumer spending has stepped in as the fuel for the economy ever since the slowdown in our resources sector. 


Are we vulnerable?  It is indeed a concern for policy makers and it is unlikely that consumer spending can power the economy for too long. There is also a huge discrepancy among the provinces. Ontario and British Columbia are strong markets, while spending and consumer confidence have taken a hit in Alberta and Saskatchewan. Also, spending has not matched income growth. 
Higher debt loads also mean that consumers now spend an average 14% of after-tax income on their debts. This is up from 11% in 1990, even though interest rates have plunged from 14% back then to below 1% today.
So what now?  When you look at the global economy, we don’t see a pretty picture – most economies are experiencing slow growth. Because Canada depends on trading partners for much of its growth, we must wait for other countries to start their turnarounds.

Moody’s Analytics chief economist Mark Zandi had this to say in an interview in the Financial Post. “I think [consumers] feel a little bit tired,” he said “There has been a lot of debt accumulation and leverage. I don’t think Canadian consumers can lead the way for the economy.”

It’s still going to take some time. The U.S Fed recently decided to hold steady its prime rate, a tacit acknowledgement that its economy still isn’t up to growth expectations.

The Bank of Canada’s Governor Stephen Poloz has been on the talk circuit, spreading words of encouragement.

 “Canada has seen this movie before,” he said in a speech to the Calgary Economic Development, a body funded by the city and private-sector partners. “We’ve adjusted to rising prices; we can adjust to falling ones. These adjustments are never easy. They are often difficult and painful for affected individuals and their families. But they are necessary.”

Eventually, however, policy-makers and the Canadian government will need to find a way to grow the economy by boosting exports, hiking government infrastructure spending or spurring capital investment from businesses in order to give consumers a break.

Is real estate a good investment? The long answer is yes

It seems it’s a tough world for Gen Y’ers – high student debt, shortage of jobs, living with parents longer, and now the dream of home ownership might have to wait. Yet, an RBC poll released early in April found that young Canadians see home ownership as a good investment and 41% of the respondents plan to buy. The poll also found that 86% of those aged 25-34 believe owning a house or condo is a solid investment, up from 78 % last year.

So is real estate still a good investment?  The RBC poll confirms that it might be, at least as far a millennials go.  “The increase in the number of those who feel the housing market is a good investment, as well as the number of those who intend to buy, really highlights that Canadians have no doubt in the strength of the housing market”  said Erica Nielson, RBC’s vice president of home equity finance, about the poll results.

Here’s how the results breaks down per province:

• Ontario, Quebec and the Prairies saw the biggest surge in home-buying interest over last year
• Ontario, 24% said they have intentions to buy this year, up from just 14% in 2013.
• In Alberta, 28 % said they hope to buy this year, up from 22 % in 2013.
• Atlantic Canada also saw some increase in buyer intentions.
• In B.C. the percentage of those who are likely to buy a home has increased slightly, from one-in-five (20%) in 2013 to more than one-in-five (22 %) in 2014.

Interestingly, a discussion initiated by the Globe and Mail asking the question about real estate as an investment received a lot of attention. Those who answered do believe that a home is an investment that builds wealth in addition to it being a place to live.

Let’s take a closer look at that. Those who are pro a home as a good investment will point to the increase in resale prices over the past 10 years, which have increased more than 6% annually since 2000, according to the Canadian Real Estate Association (CREA), which is triple the inflation rate. This increase helped improve a household’s net worth, unless you were under the age of 35.

In February, Statistics Canada reported that the median net worth for families increased 78% from 1999 to 2012 on an inflation-adjusted basis, or about 4.5% a year. However, in households where the age of the highest earner was under 35, net worth grew just 8.6% in total, or about 0.6 per cent a year. Since inflation averaged 2.2 % over that period, as reported by Rob Carrick in the Globe and Mail, “those young-adult households actually lost net worth on what economists call a real basis.”

That’s not really a surprise since gains in net worth have been driven by real estate appreciation and those under 35 years of age have less equity in their homes. Can they catch up? Well, prices can’t rise indefinitely – so say many economists – so that may not be helpful when trying to make a sound financial decision.  However, there are a few hot markets in the country that might buck the trend.

For example, in Alberta, and especially in Calgary, real estate is a growth industry. Heather Manna, Managing Partner and Mortgage Broker at TMG Millennium Mortgage Group in Calgary says that real estate definitely is a good investment. “Over the last few months we have seen lenders loosen the reins on financing restrictions, which is making it easier to qualify a consumer who is in the market to purchase a new home,” she said. “This, combined with the low mortgage rates, continues to make real estate a great investment, whether you are buying to occupy the home, or purchasing for an investment.”

And why not invest in real estate, Manna asks? “Just like the stock market there will always be lows and there is always a correction. It’s about keeping well diversified and that includes having your home in your portfolio,” she said. “If you need a roof over your head, you might as well be paying your own mortgage down instead of someone else’s.”

There is also a shortage of listings in the Calgary market, which is upping the prices there. The rental market is also very tight with a 1% vacancy rate. “If not purchasing a property long term for your family, the rental market proves to be aggressive year-after-year for income earning potential or a retirement plan,” Manna added.

Granted, Calgary may be an exception, however there are similar hot markets in both B.C. and on the Prairies. Ontario and the Atlantic provinces have hot areas. Some economists say that prices will struggle to show any real gains in the next five to 10 years unless you happen to be in a hot market. But in some of those markets affordability is the real issue and young people are looking for help with larger down payments from their parents.

The hidden story for Gen-Y’ers is debt load. Statistics Canada says under-35 households owed $36.44 per $100 in assets in 2012, by far the highest of any age group. Purchasing a home adds to that debt load, not only with mortgage payments, but interest, property taxes, insurance and maintenance costs. If there is a modest 5% drop in house prices, then a 5% down payment equity position is wiped out.

However, in a Globe and Mail article published on Wednesday, April 23, Will Dunning, chief economist of the Canadian Association of Accredited Mortgage Professionals (CAAMP) says he thinks that home prices have turned.

Using data from the CREA, he said that sales of existing homes rose last summer and peaked in the August-September period. Although here has been a slight rise during the past two months, he doesn’t see this as meaningful.

Dunning referred to the Teranet-National Bank home price index, which shows a very gradual increase in prices over the last while. “If you take the price index and seasonally adjust it, it shows a sharp pick-up in price growth around the time I would have expected it to have occurred, and “the last data point hints that on a seasonally-adjusted basis, the period of rapid growth has ended – when it should have.”

With prices stabilizing, low rates, larger down payments, real estate starts to look better, especially as a long-term investment, which it actually should be. There was a time when a couple would buy a house, live there, raise their family there, and then retire there, mortgage free. We may be coming into those times once again.

 The most important question to ask is, “am I ready?” Consider a home a long term investment -- its value will fluctuate up and down over time, but eventually you’ll be mortgage-free. It’s a big commitment, but it’s also a great achievement. Home ownership offers a great deal of personal satisfaction, as well as financial stability.

There is no right or wrong time to buy a house. Mortgage rates and house prices will fluctuate but over the long term, home ownership is still a sound investment. 

Ask yourself:

•  Are you at the point in your life where the idea of home ownership is attractive and makes sense, both now and for the long term? 
• Do you qualify for a mortgage, and how much? If you don’t know, talk to a mortgage professional.
• Can you manage the mortgage payments as well as other expenses that may come along with home ownership, such as maintenance costs and higher insurance fees? 
• Do you have a down payment?
• Do you have a strategy to take advantage of this low interest rate environment to more aggressively pay down your mortgage and accumulate equity?

If you answered yes, then it’s the right time to invest in real estate.

Low rates, recession and debt

The Bank of Canada has recently kept its benchmark lending rate at 1% so the banks have kept their Prime lending rate at 3%. Fixed rates are heavily discounted – a posted rate of 5.39% can be had for 3.59%. Lines of credit are at Prime plus .50 or plus 1% depending on the lender.  However, this cheap money is not without its costs.

Canadians are now carrying an enormous amount of debt, not only in mortgages but in non-mortgage debt, including credit cards, personal loans, lines of credit, etc. This, despite the warnings from policymakers of the danger of carrying these debt loads if interest rates do go up.

Are we heading for a recession as some newspapers and other media suggest? One economist thinks we’re already in a recession. Derek Burleton, deputy chief economist for TD said that we are in a “balance-sheet recession that will take years to shake off so interest rates will stay low for a very long time.”

Even the Wealthy Barber David Chilton has jumped back into the fray with his latest book warning about the dangers of saving too little and taking on too much debt.

With 24/7 news, our financial state of affairs gets far too much analysis, and we get very contradictory statements. It’s not all doom and gloom. A recent poll found that most Canadians feel they have their debt situation under control. And a majority of those polled saw paying down their debt as more than or just as important as saving for the future.

The bottom line is this: Cut your debt while you’re still working and interest rates are low. When rates to go up, you won’t be handing over your well-earned money. Instead, you’ll be on the receiving end because you’ve invested wisely.

And with mortgage interest rates so low, it’s easier to reduce mortgage principal since more of your payment is going to principal rather than interest -- look at the low rates as a way of owning your home free and clear sooner.