News stats..Higher debt, but lower defaults

Saw this article today about higher consumer debt levels BUT lower defaults.   Equifax Canada is quoted as saying that consumer debt rose by 7.2% in  the second quarter 2014 to $1.45 trillion ,compared with $1.35 trillion from a year ago. This includes credit cards, loans, lines of credits and mortgages.

The average Canadian now has $20,759 in personal debt, excluding mortgages.   That’s a 1.5% increase since last year.   So that means mortgage debt has risen by around 7%.    Here’s a heads up… you will see and hear articles sounding the panic alarm… again.

Well, before we hit that panic button, there was one more stat that we should pay attention to.   DEFAULTS.   Defaults are at their lowest level since 2008.  If higher consumer debt levels and lower defaults sound strange to you, it shouldn’t.    I’ll explain…

Mortgage rates have been at or near all-time lows for the past 5 years…  THERE’S A SECRET BENEFIT TO HAVING A LOW RATE… and most consumers are unaware of this fact.     When you pay a lower rate of interest, you also pay more towards your principal balance and less to interest.!!   The end result is that you are paying off your mortgage much faster than expected, hence, you build more equity in your home, sooner than ever before.

Confused?  I’ll explain..    Let’s look at the numbers..   We’ll look at 2 mortgages with very different interest rates.   We’ll use a $400,000 mortgage with a 25 year amortization.

MORTGAGE A) has an interest rate of 6.00% (it’s high by today’s standards but it’s below the 25 year average).  At the end of 5 years, the balance owing is$ 359,346   and total monthly payments = $153,553.

MORTGAGE B) has an interest rate of 3.00%.  At the end of 5 years, the balance owing is $341,898 and total monthly payments =  $113,578.

There are several ways to analyze this info… here’s the easy math..   The homeowner with Mortgage A) benefited by $57,423 with that lower interest rate... in just the first 5 years!!!   That’s an incredible savings.     And they immediately added $17,448 worth of equity in their home by having a lower balance owing after 5 yrs.

Now think about how this math would work if you had a Variable rate mortgage… Variable rates have been as low as 1.35% in the last 5 yrs and is presently at around 2.40%.  The savings would be even more mind blowing!

The point to make is this…  We are paying off our mortgages faster because of the lower rates.   We are building more equity into our homes.    This allows us to access that capital and move up to a bigger home or borrow to invest.   If defaults are at the lowest levels since 2008, does this mean we are managing our debts wisely?   I think so.

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca