The original posting of this story by Report On Business spurred me to add my commentary, is italics throughout.
Over-exuberant Christmas shoppers only have months to get control of their overspending before higher interest rates risk further complicating their lives, credit counselling experts warn.
With Canadians swimming in debt, forecasts of higher interest rates midway through 2010 could push more people over the edge by hampering their ability to pay off expenses.
“It’s a huge concern,” says Laurie Campbell, executive director of the non-profit counselling service Credit Canada.
Those most at risk are homeowners who must renegotiate their mortgages. Higher rates would increase monthly payments, leaving less to pay other debt.
I don’t read mainstream media consistently, because of the melodramatic way they report things. In Mississauga, with the average house value being in the $360,000 range and a 20% equity, people would have an 80% mortgage, or a mortgage of $288,000. If rates rise 1% all in one fell swoop, the payment would go up by $155 a month. While that is no small chunk of change, it is an easily-manageable amount. That’s less than the cost of buying lunch every working day; it’s less than many spend at Tim Horton’s in a month; and it’s far less than the average person spends unnecessarily on discretionary stuff. Oh, sorry, my readers, I forgot, logic doesn’t trump lousy reporting and scare tactics in the media. My bad.
Spending by Canadian households averaged $71,360 last year, 2 per cent more than in 2007, with shelter representing about 20 per cent of the load.
The Bank of Canada has repeatedly warned of late that record household debt is the biggest risk facing the country’s financial system. Bank Governor Mark Carney said that up to 10 per cent of households could face difficulties in meeting monthly payments when interest rates rise to normal levels.
However, an estimated 40 per cent of mortgage holders with high debt payments could increase their flexibility by suspending accelerated pay-downs on principal.
Um, yeah, okay, I guess the writer has never tried to do that! It’s one thing to increase your principal payments – they love to let you do that. But, in a completely absurd twist of logic, they make you re-apply for a mortgage if you want to lessen the principal payments. Yeah, makes sense to me – when you take away the banks interest income, by paying your mortgage off faster, they greet you with open arms; give them the opportunity to make more interest income and they make you jump through so many hoops. Once again, my bad for thinking logic has any part of all this. No wonder it’s easier to buy a $75,000 car that you could drive to LA & sell for $45,000 than it is to buy a house that ain’t goin’ anywhere!
Of course, presuming you used a great mortgage broker to get your mortgage, and he/she advised you not to write the loan at the higher principal payments, you’ll be fine with this and can just stop making the extra principal payment.
High interest rates have a major effect on a person’s cash flow, said Paul Salewski of Ottawa-based financial, credit and debt counselling agency Doyle Salewski. A doubling of mortgage rates to eight per cent would, for example, increase monthly payments by nearly $500 for homeowners with a $200,000 mortgage.
Please, don’t be so insulting! Talk about fear-mongering!! First of all, does a single breathing person actually believe that they’ll double rates overnight? Does anyone believe that there won’t be massive media attention paid in advance? Your great mortgage broker will be completely on top of things and advising you when to move your mortgage from a Variable Rate to Closed Rate. I’m equally sure that they will have had a chat with you when arranging your mortgage about what the payments would be at higher rates.
“All of a sudden they’re maybe have to increase their payments or who knows what they have to do in order to get by,” he said.
Since it’s too late to avoid the commercialization of Christmas, credit counsellors suggest people look at strategies for dealing with their spending spree as soon as the holidays wind up.
Recommendations include tackling high-interest credit card debt first — obtain a line of credit or consolidation loan if possible, stick to a spending budget and try to amass an emergency fund.
Yeah, that’s the ticket – arrange a line of credit, which usually means it’s going to be tied to prime, and increase your exposure. No, the answer is to start right now on eliminating all that discretionary spending.
Whatever you do, don’t rack up more credit card charges as you develop a plan of action to tackle debt.
Ms. Campbell said there’s no need to have more than one or two charge cards. Paring the number of cards over time will also limit the ability to make foolish decisions.
Despite increased restrictions, she expects that more Canadians will turn to bankruptcy to address their financial problems in 2010. Among them will be high-income earners who have begun to seek credit counselling in greater numbers.
“I think it’s really important for people to understand not to panic,” Ms. Campbell said, adding that help from counsellors is available.
Mark says a huge weight has been lifted off his shoulders since he sought such help to address $10,000 of debt he had amassed following his divorce several years ago.
“I just didn’t know how to quite handle my new freedom,” he said in an interview.
His credit woes caused him mental anxiety, depression and loss of sleep.
The 56-year-old caretaker said his problems worsened when he turned to pay-day loans to accommodate his increased spending on cigarettes, alcohol and general living expenses.
Every two weeks he would pay $25 interest for each $100 borrowed at a store-front operation in Toronto.
“You get to a point where you have to borrow again to get yourself back to where you were,” said Mark, who didn’t want to be identified.
Consolidation of his debt and regular monthly payments should allow him to resolve his financial problems and re-establish his credit within two years.
“As long as I keep a handle on it, it’s OK.”
Sorry, I know that more and more people are facing financial difficulty these days, and a lot of it is brought on by their emotional approach to things. When I was active as a mortgage lender, I was amazed at how many people would have $100,000 in high-interest debt, and $200,000 in equity in their house. They wouldn’t dream of re-financing their house at 7% to pay off their 20% debt, because of the emotional attachment to owning their house free-&-clear. That’s plain crazy!
IF you have a VRM, you need to start now paying attention to all the talk about where interest rates are going. You need to hook up with a mortgage broker, NOT talk to your bank about things, and you need to consider locking in your mortgage NOW.
Sure, I’m pretty conservative when it comes to this, and haven’t taken the ride on the VRM-train.
If you need contact info for a great mortgage broker, just ask.