A mortgage for most families represents the single largest debt of their lifetime. That makes the findings of a new survey from the Bank of Montreal especially alarming. Almost one in six Canadians said they couldn’t handle a $500 increase in their monthly mortgage payments. The survey’s findings are in line with last weeks’ blog post – although more Canadians are making debt payments on time, Canadians continue add to their personal debt.
According to BMO, 16 per cent couldn’t afford such an increase, while 27 per cent said they would need to take a look at their budget. Only 26 per cent they could probably handle it, although they would be worried. In its example, BMO used a fictional home with a $300,000, 25 year mortgage where mortgage rates increase from 2.75 per cent to 5.75 per cent.
Since interest rates are likely to go up sometime in the future, it’s the perfect time to make a detailed debt management plan. While the main goal for most families should be to pay off debt, it’s a good idea to start with bad debt. Bad debt is money borrowed for goods that are consumed right away or depreciating assets. Examples include car loans, credit card debt and borrowing money for vacations.
Having too much bad debt on your family’s personal balance sheet has the potential to destabilize your family’s financial situation. However, when you have a financial professional on your team, you can develop a financial plan that acts as a road map to get your finances back on track.
Despite sage advice from financial planners on debt repayment, Canadian households continue to take on more debt. The household debt-to-income ratio rose to 164.6 per cent in the second quarter of 2015, up from 163.0 per cent in the first quarter. In layperson’s terms, that means for every dollar of disposable income, the average Canadian owes $1.65 in consumer debt.
What’s encouraging Canadians to take on so much debt? Almost half (47 per cent) think it’s due to rising real estate values, while 40 per cent say low rates are the main cause. Interest rate have been hovering near record lows all year. In fact, the Bank of Canada has already reduced the overnight lending rate two times this year.
When interest rates are low, it generally makes sense to repay debt. Unfortunately, only 35 percent of those surveyed are planning to pay down their mortgage sooner. Instead of debt repayment, many Canadians are using low interest rates to take on bigger loans and upsize their houses, leaving them vulnerable if interest rates eventually rise.
Are you looking to get your family’s debt under control? Are you considering to repay your debt sooner? Feel free to contact our office and let us help you fully weigh your debt options.