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Posted 1 Comment on Good debt and Bad debt…. maybe we Canadians have more good debt? Consumer Debt

Good debt and Bad debt…. maybe we Canadians have more good debt?

I saw this recent article about Good debt and Bad debt…  Canadian Personal debt levels have now surpassed $1.5 trillion.  That’s a big number… should we be concerned?  I started to wonder how much of this is Bad debt?  Let’s take a closer look at these stats.

First, let’s define Good debt.. I agree with the article….to me, it’s debt that is used to accumulate an investment or asset….  and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible…..  investments like a rental property, stocks, bonds, etc would qualify…Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property related costs from the rental income.

Bad debt is any expense where the interest is not tax-deductible and is used to purchase consumer goods… things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa..etc…  Hey, we all spend some money on these items, the key is to have some discipline.  Borrowing to buy a TV, computer, take a vacation, etc is generally a bad idea… save up for these purchases and then pay in cash.

Now the stats say that $1.5trillion makes up all personal debt including mortgages….  Hey, wait a minute… outstanding mortgage balances recently topped $1trillion in Canada…. If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $1.5trillion…

We now have $500billion in potentially bad debt…  So let’s amend the household average debt to $58,000 per family of 4.   Is that really a high number?  And let’s look at our asset base… Guess what?  Our personal asset base is appreciating in value…Here’s a previous article that shows Canadians are borrowing wisely and we just taking advantage of theses record low interest rates to enhance our net worth…  And here’s a more recent article from CBC.ca stating our household credit is growing at it’s slowest pace since 2002.  Good to see some positive news put out by the media.

Remember, Good debt can help you grow your net worth… Bad debt is for personal lifestyle and usually decreases your net worth… We all have some bad debt, we just need to minimize it as best we can.

Posted 1 Comment on Banks quick to raise but slow to lower rates Interest rates

Banks quick to raise but slow to lower rates

Nothing new about this story…. Since April 11-2011, the 5 year bond yields went from 2.87%,  down to 2.10% on June 24th, and have gone up slightly to 2.34% on July 1st….  Remember, fixed rates are closely tied to the govt of Canada bond yields…So that means the Banks would have lowered their fixed rates accordingly and then raise them slightly, right?

Well, not really…  On April 11th, the Big Six Banks posted rates were 5.69%.. they went down slightly to 5.39% recently but are back up to 5.54%…   What’s wrong with math…?  Why didn’t the Banks reduce their rates accordingly?    It’s called MAXIMIZING your PROFIT…  The banks want to earn a little more at the borrowers expense.

I find it kinda funny but also frustrating when I see articles reporting that Bank profit margins on mortgages is shrinking…  The spread between the 5 year bond yield and the posted 5 year fixed rate is around 3.20%…  and historically, it’s been around 2.50% and sometimes even as low as 2.00%….  Where’s the fierce competition, I wonder?

Banks are a business that want to maximize their profits… Let’s not forget this.

Posted Mortgage News

48% of Canadians use Mortgage Brokers

CMHC released their 2011 Consumer Survey recently …. the big stat that pops out is how many First time home buyers use Mortgage Brokers….. 48% of Canadians use mortgage brokers. 

Canadians are paying their mortgages off sooner… 39% have their payment set higher than the minimum required…. 20% have made a lump sum payment since obtaining their mortgage.

But here’s one stat that tells me Mortgage Brokers need to do a better job when it comes to keeping in touch with their clients and keeping them informed…. 89% of renewers and 68% of refinancers did not change lenders.. they stayed with their current lender. And probably renewed or refinanced at higher rates than they could have obtained through a Mortgage Broker.

Most Banks don’t offer their best rate to existing clients… and that’s a fact… read this article about Borrowers being too complacent and how Mortgage Brokers create competition….

Some more Key Findings from the survey can be viewed here.

Bottom line is that you can lose $$thousands by not seeking professional advice…

Posted Mortgage Rates

TD Economics forecasts no Variable rate hike til 2012

This week, TD Economics said the Bank of Canada probably won’t raise rates til 2012.   How quickly things can change.  Just a few months ago, most Economists and Financial Experts were calling for the Bank of Canada to raise rates this summer.. some said as early as May… Well, that didn’t happen.

There are many reasons but TD’s Chief Economist, Craig Alexander, said it was low inflationary expectations, the negative impact on the European financial instability (Greece, Ireland, Spain, Portugal) and the high $Canadian dollar.  We can also through in Japan’s Tsunami and the Middle East political uprising.

Fixed rates have also not gone up as the Economists were forecasting earlier this year.  Instead, they have come back down to historical lows, once again… The Bond market affects fixed rates and we’ve seen the 5 year Canadian Bond drop 80 basis points since mid April.

All this is great news for borrowers as there appears to be little pressure to raise interest rates anytime soon.

Posted Mortgage News

International Mortgage Trends…. first edition

Consumer confidence is everything…  If you feel confident about your job, the economy and housing market, then you probably feel confident about buying a home and being able to pay your mortgage.   Measuring consumer confidence isn’t easy to do…   How about measuring the attitudes of homebuyers from 8 different countries?

Here’s the first edition of International Mortgage Trends, by our friends at Genworth Financial.  This report assesses homebuyer’s attitudes and sentiments from 8 countries spread out over 4 continents.

Surprisingly, the report puts India in the top of most categories, but Canada, Australia and Mexico also shared top spot in many categories.  Ireland, UK, Italy and the U.S. homebuyers were not as optimistic about home ownership and mortgage debt.   Here are some highlights from the report:

  • India and Mexico felt the most confident about how their national economies would do in the next 12 months…Canada and Australia were not far behind.  Ireland and the UK were at the bottom (no surprise there).
  • India and Mexico were also the most confident about their personal financial situation….Australia and Canada were next…Italy and Ireland were most concerned.
  • Rising fuel costs and living expenses seemed to be top concerns for many in almost all countries except Mexico.
  • India and Mexico had fewer problems paying their mortgage debt over the past 12 months… Canada was in the middle of the pack (this was a surprise to me).
  • Living with your parents stat … (reminds me of that movie ‘Failure to launch’… I have a cousin that’s in this situation)… But this can save you money… Over 80% of First time homebuyers (FHB) in India and Mexico share the home with more than one generation… and it’s also more common in other European and Asian countries…..   Canada, UK, and the US are much less likely to house multiple generations under one roof.
  • Average age of the FHB keeps going up… it’s now 31.58 years of age… compare this with 26.6 years of age in the 1970’s… (in Canada, it’s 30.26 years of age).
  • Affordability…42% of FHB feel it’s a good time to buy a home…. 47% for Canadian FHB…and only 6.4% for India (this stat puzzled me after all the other positive outlooks by India’s FHB)
  • Only 30% of all those surveyed were positive about the state of the economy… In Canada, it’s 38%…

There’s a lot of data in this report… I recommend taking a few minutes to review…. Scroll to 18 to see each country’s summary stats and see how Canada compares… In short, Canada seems to have a cautiously optimistic outlook.  Our conservative reputation stands out in most categories.