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Jeff Schwartz

House Poor in Canada

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It’s a commonly-held belief that Canadians make it a priority to pay for shelter costs ahead of other household spending. Mortgage payments and utilities typically receive more attention than transportation, clothes, and entertainment. First things first: we need a roof over our heads, we need running water, and we need the lights to be on.

It’s a commendable trait in many ways – our home will likely be the largest asset we ever own, and falling behind on mortgage payments will put that asset, along with our credit profile and entire financial outlook, into jeopardy.

But what happens when our prioritized spending creates a debt burden that is too heavy to bear? If we remain fixated on paying our housing bills, what happens to our other necessary expenses?

The Canada Mortgage and Housing Corporation (CMHC) measures housing affordability by setting a threshold of 30 per cent of your income – if you are spending more than that on your monthly housing costs, you’re spending too much. Consolidated Credit actually recommends a lower percentage at 25 per cent.

Despite this, Statistics Canada’s National Household Survey found the following:

• About one in four households (25.2%, or 3.3 million) spent more than the CMHC-recommended amount.
• Of the homeowners that exceeded the threshold, they spent an average of $1,259 per month, which Statscan says represents an average of $510 greater than the 30 per cent limit.

These numbers suggest that those 3.3 million households are not just exceeding the limit – they’re obliterating it. And it begs the question: how are they making ends meet?

I Fear that Canadians are Covering Basic Living Expenses by Leaning on Credit

My organization has helped hundreds of thousands with Canadian debt, and it is not uncommon for us to get calls from people who are doing everything they can to keep their homes, even if it means going into debt and paying high interest rates to pay for everything else.

I’ve got news for you: if you’re paying for your housing by shifting other costs of living over to your credit card, you’ve created a false sense of financial well-being and you are living beyond your means.

What are a few steps to take to re-calibrate your spending priorities?

Wants and needs.

Yes, housing is extremely important, but it’s not the be-all-and-end-all. Go through your credit card and bank statements, look at what you’re spending money on, and divide everything into two categories: “wants” and “needs”. If a long list of “wants” (cable TV, restaurant meals, entertainment, etc.) are pushing you into the red, making a couple of cuts will go a long way in bringing you back to black. But if gigantic housing costs mean that “needs” alone are exceeding your income, you might be in serious trouble.

Track your spending.

It’s one thing to adjust your budget and it’s another thing to actually adhere to the changes that you make. Keep yourself honest and use a budgeting app for your mobile phone so that you can track your spending on-the-go.

Keep your savings alive.

You may be making your mortgage payments, and you may be paying all of your monthly bills. But are you contributing to your savings? Your savings account is truly your financial barometer – if you can’t make regular contributions, it probably means that you are stretched too thin. But your savings account is much more than a simple metric of your financial health – it also serves as a financial lifesaver in the face of sudden job loss, illness, or any other of life’s little financial surprises.

Downsize housing if you need to.

The most obvious piece of advice is also the most heartbreaking to many people. If you can’t afford your house, you can’t afford your house. So many people have emotional connections to their homes, so it is easy to understand why they would fight so hard to hang on. But moving to a less-expensive property is at least worth some consideration. Cashing in on some of your home’s equity might just square your finances and eliminate your financial stress. And remember that nothing is forever – a step backwards is temporary and you have plenty of time to build a sustainable path back to your dream home.

How Low Interest is Affecting Canadians

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Back in January 2015, the Bank of Canada made the surprising move of lowering the key interest rate from 1 per cent to .75 per cent, shocking those who thought a rise was inevitable. But surprise factors like an oil price plunge forced the Bank’s hand, as they made the first adjustment to the key rate since September 2010.

The business section of your newspaper has been filled with stories about it ever since, still peppering in reminders of the “inevitability” of a rate increase, and filling us up to the brim with graphs and pie charts about the economy at large.

But what has it done to your life? Are fractions of percentage points actually meaningful? Are there ways to take advantage of low rates? Are there dangers or risks? Let’s take a look at some of your options.

How Low Interest Rates Might Affect Mortgages

Mortgages are the single biggest piece of debt that most of us will ever have, so if you want to take advantage of low interest rates, this is probably the place to start. If you’re in the market to buy, this is a great time. A recent Bank of Montreal home buyers survey found that more than a fifth of millennials have shortened their time-frame for home buying, thanks to the low rates.

People shopping for mortgages might want to consider taking the fixed-rate option. Historically, variable rates have been better for homeowners, but some financial experts think now is a time to lock into a fixed-rate. Ted Rechtshaffen, president at TriDelta Financial, argues that a lot can change over a 5-year period, and the risk of variable rates are not worth the reward of the small premium you get when choosing them.

Current home owners can also take advantage by making their mortgage payments as if there was no drop at all. The Canadian Association of Accredited Mortgage Professionals said over a third of Canadians were able to bump up their payments in 2014, with some renewing their loan at a lower interest rate. More money going toward the principal instead of interest means faster repayment and a lot of savings.

A Lower Mortgage can Create Opportunity for Credit Card Debt

If your mortgage payments aren’t as high as they used to be, there are other ways to spend the difference. The key interest rate may be low but your credit card APR is still astronomically high. If you are only making minimum payments on your credit card, you are not making very efficient use of your money. If your mortgage payment has dropped by $150 a month, putting some or all of that toward your credit card will dramatically reduce your debt and save time and money.

Consolidated Credit’s credit card debt calculator illustrates this idea. If you’re making the minimum payments on a balance of $3,720 (the average Canadian credit card debt), at 19 per cent APR with a minimum monthly payment calculated at 2 per cent of the balance, it would take nearly 50 years and cost you $13,000 in interest.

Add your monthly mortgage savings of $150 to your minimum payments and your debt will melt away. You’ll repay the balance in two years instead of fifty, and you’ll save over $11,000 in interest payments. It’s a no-brainer.

Tread Carefully

Before we get carried away, let’s not forget about the “inevitability” of interest rates rising. If you’re taking advantage of lower rates, make sure your budget can handle the eventual bump in rates. Try stress-testing your finances by pretending the rates have increased, and see whether or not you can still meet your financial obligations. Chances are, any actual increases will be gradual and will allow you the chance to make your own budgetary adjustments. But it is still a wise move to tread carefully and try not to over-extend yourself. Make hay while the sun shines, but keep an umbrella handy.