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CategoryConsumer Debt

These Eggs do belong in one basket

Our parents taught us to pay our mortgage off quickly… Great advice, but they forgot to tell us to not incur other debt while we were paying that mortgage off….

A few years back, there was a study done about Debt Diversification by Moshe Milvesky, Associate Professor of Finance at Schulich School of Business Milevsky debt review.   The study showed that we were using the old rule of ‘Don’t put all your Eggs in One Basket’ and applying that to our debts.   And this is exactly what you should NOT be doing…

Investment diversification is GOOD, Debt diversification is BAD.   The study used $95,000 as a typical amount of diversified debt and $2,700 in idle cash…. the conclusion is that this combination results in a $1,000 loss per year by not managing debts properly.

If you have equity in your home and you carry a balance on your credit card, line of credit, or have a car loan or student loan, then you should consider utilizing the equity to borrow at the lowest rates possible… Residential Mortgages are always the cheapest form of financing…

HST reference sheet

July 1st is Canada Day.. but for the residents of Ontario in 2010, it will be the launch of the much talked about Harmonized Sales Tax or HST…(let’s call it HST Day).

We took a closer look at how this will affect the average citizen and found an interesting reference guide from the Ontario Government.  HST- Ontario reference guide It  lists what is and isn’t affected…

Surprisingly, a great many things will not be affected, including Resale homes and new homes under $400,000.   Still, this new tax (and I do call it a new tax since I, personally, will be affected negatively) will affect us all one way or another…. Real estate commissions, lawyer fees, death (yes, funerals are now subject to retails sales tax), hockey arenas, gym memberships, karate classes, ballet classes, soccer, hockey (yes, our national sport),  haircuts and many other services….

New home purchases over $400,000 are eligible for a $24,000 new housing rebate (must be your principal residence).

This new tax may not be popular and I question the timing of it’s introduction (coming out of a recession), but I don’t think this will have a huge impact on the majority of us.  HST Day is coming….take a look at the reference sheet and see how it will affect you…  What do you think?

Are our Personal Debts too high?

2 reports came out recently that received  much air time on TV, Radio and Internet.   Let’s look at these reports from the CBC

1-The Certified General Accountants Association stated that the average Canadian’s debt is $41,740 per person….Apparently, it’s among the worst of the 20 most advanced countries in the world…

Well, let’s think about that for a moment ask some questions….

  • I wonder how many people have borrowed to invest lately?
  • $44k per person… is this a high number?  I mean, what does a basket of goods cost in some of these other top 20 countries like, Greece, Hungary, Poland or the U.S.?  Aren’t things more expensive in Canada?
  • Canadians have a reputation of being conservative….are we borrowing wisely?  Could it be that Canadians are taking advantage of these record low rates to borrow for rrsps, resp, stocks, real estate or other good investments?

2- The Canadian Association of Accredited Mortgage Professionals reported that 475,000 Canadians would be challenged if their mortgage rate went above 5.25% and 375,000 were already facing pressure to pay their bills.

  • I spoke with a contact at Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial, the mortgage insurance companies that insured hi-ratio mortgages.   There was no indication that Mortgage defaults were a problem.
  • I have not seen any reports that show our Mortgage defaults are in trouble.
  • Canada is near or  has the lowest mortgage defaults among the top 20 countries.
  • why would you take a 5 year fixed rate at 4.59% (today’s rate) when you could get 1.70% with a variable rate?  How long will it take before variable rate reaches 5.25%?   2, 3, 4 years or more or never?  Where will our debt load be at that time?

I think the confidence level in Canada is strong…  let’s keep it that way…    Spend and borrow wisely…

Long term contracts have a price

Here’s a great article written by consumer advocate, Ellen Roseman.  She points to different industries where signing in for the long term protection can be very costly and expensive.

Ever wanted to change cell phone providers?  How about internet providers?  Move your investments or rrsps?  Cancel that hydro or gas contract because you moved?

And how about mortgages?  When interest rates started heading downward about 12 months ago, thousands of borrowers in fixed rate mortgages wanted to get out of their higher rates and start benefitting from the record low interest rates we have been seeing.

But they were shocked to hear of unbelievably high early prepayment penalties… the example Ellen uses is about a $46k penalty on a $530k mortgage with a major bank…  I’ve seen dozens and dozens of situations like this.

Beware of long term mortgages… with the average person moving or refinancing about every 3 years, choosing a 5 year fixed rate term is usually not the best option.  It could cost you more than you think… always seek professional advice from a reputable mortgage broker before selecting your mortgage.

(Just a personal note… It sure would have been nice to see some mortgage relief given to the average homeowner during the recession.   CMHC used to cap their penalties to 3 months interest but removed this cap in 2000…quietly, all financial institutions are free to charge a higher penalty…and they all do.. the longer the term, the greater the penalty…)

58% of Canadians want to pay down their debts

The latest Canadian Consumer Outlook index showed that 58% of Canadians are worried about their debt.  This is a great time to get your debts reviewed…. a financial check-up…

With December credit cards bills coming in and your property tax bills coming up in the next few months, now is the time for a review… and guess what.. you might be pleasantly surprised to discover that there is some savings potential in your mortgage.  Debt Consolidation is not a bad word.

Call your mortgage broker for a review today.

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