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.

Brough to you by the Keller Institute at Baylor University . . .

Momentum building as Canada’s housing market shows continued strength . . .

There’s real reason for optimism this month as Canada’s housing market points to both recovery and potential signs of strength to come. In Canada’s major real estate markets pent-up demand for residential property, low interest rates and greater affordability continue to boost sales. The rise in sales is in turn helping to bring about more balanced market conditions, with lower inventory levels and upward pressure on housing values.  Good signs for the market – and a more level playing field for buyers and sellers. In fact, in especially attractive neighborhoods, it’s not uncommon to witness multiple offer situations.

Sales figures are encouraging, as June marked the fifth consecutive month of rising sales activity and represents the first time since January 2008 that monthly activity surpassed 40,000 units. According to Dale Ripplinger, president of CREA, “Potential buyers who moved to the sidelines late last year when economic uncertainty peaked are returning to the housing market now that the worst of the recession may be behind us.”

Spotlighting affordability, Canadians have benefitted from doses of price cuts as home prices and mortgage rates have decreased considerably since last year. They are the primary reasons home sales have remained relatively healthy in the midst of a broader economic challenges. Financing remains largely available through normal banking channels and the loosening credit market is a sign of effective monetary policy.

Fundamentally the Canadian economy is improving, supported by strengthening consumer confidence. Prospects for positive growth in 2009 and 2010 remain slow but encouraging. The Bank of Canada believes the end of the recession may be here, but unemployment and the appreciating loonie will continue to be major topics of economic concern.

June marked the fifth consecutive month of rising sales activity and represents the first time since January 2008 that monthly activity went above 40,000 units. According to Gregory Klump, Chief Economist of CREA, “The Bank of Canada has acknowledged that pent-up demand from late last year and earlier this year, combined with low mortgage rates, has resulted in a stronger than expected recovery in the housing market.”

The national average home price recorded new heights on a monthly basis with a 2.1% gain from May, putting it at 18.9% above its low in January. A strong rebound in sales activity in Canada’s most expensive markets continued to skew the national average price upward.

The supply of homes continued to be drawn down in June, with 16% fewer new listings coming onto the market compared to the same time a year ago. “Pent-up demand from late last year and earlier this year, combined with low mortgage rates, has resulted in a stronger-than-expected recovery in the housing market,” said CREA Chief Economist Gregory Klump. With fewer new listings and rising sales activity, the selection of homes available for sale may shrink further.

In its meeting on July 21, the Bank of Canada held its benchmark overnight lending rate steady at 0.25%. As a result, key mortgage rates stayed relatively stable. The 5-year conventional mortgage rate remained under 6%. While rising from record-low levels to 5.85% last month, they are still 1.3% lower than the same time last year.

Taskforce to Focus on Financial Literacy

The government recognizes that a strong, stable financial   system relies on consumers who are cognizant about using   and managing credit. The government is taking steps to ensure education and information needed to make informed decisions is available for all.

As part of Canada’s Economic Action Plan, the government intends to take measures to increase education about finances to all Canadians.  Recently, the federal government announced that it will attempt to organize all stakeholders by forming a unified taskforce. Including business, education, and volunteer representatives, the taskforce will make recommendations to the minister of finance about ways to achieve enhanced financial literacy across the country. This is expected to benefit all Canadians with a bank account, mortgage, or credit card.

The taskforce expects to continue discussion into 2010.

Protect Your Home:  Be Informed on Insurance

Before purchasing a home, many homeowners hire an inspector to identify potential problems. This ensures there are no unknown expensive problems the buyers will inherit once the home becomes theirs. After purchasing a home, buyers purchase homeowners insurance in the unexpected event that anything damages the home.

A study by the Institute for Catastrophic Loss Reduction (ICLR) revealed that the majority of homeowners were not aware of what types of disasters their homeowners insurance protects against.

While 99% of homeowners knew fire damage is covered under their basic insurance, only 29% understood that flood damage was not.  In fact, homeowners typically incorrectly answered half of the hazard-related questions in the study.

Do you know what is covered on your insurance policy? Check your policy to ensure that you are covered for everything you believe you are.

Smith Manoeuvre

• Is it time to lock in your mortgage?
• Confidence in housing market a ‘good sign’: economist
• U.S. house construction rises in May

This Week’s Quotation:

“The only limit to our realization of tomorrow will be our doubts of today.” – Franklin D. Roosevelt (1882 – 1945)

This Week’s Highlights:

• Housing starts perk up
• It was the worst of times
• Is the end in sight?

WEEKLY ARTICLES OF INTEREST

Is it time to lock in your mortgage?

One mortgage broker seems to think so. Here’s why

Jas Grewal’s reaction to the recent runup in interest rates was to abandon a sweetheart of a variable-rate mortgage in favour of a safer, but more expensive, fixed-rate mortgage. Mr. Grewal, you should know, is a mortgage broker. A mortgage broker who sees the potential for much higher rates in the future. “read more….”

OTTAWA — Despite a stream of negative economic news, most Canadians who’ve recently bought a home have confidence in their decision, according to a survey by the Canada Mortgage and Housing Corporation. A national consumer survey released Tuesday said 90% of recent home purchasers believed that a house is a good long-term investment. Almost 70% of respondents also said they felt that this is a good time to buy a home.“read more….”

Construction of new homes in the United States jumped in May by the largest amount in three months, providing an encouraging sign that the nation’s deep housing recession was beginning to bottom out. The Commerce Department said Tuesday that construction of new homes and apartments jumped 17.2 per cent last month to a seasonally adjusted annual rate of 532,000 units. That was better than the 500,000-unit pace that economists had expected and came after construction had fallen in April to a record low of 454,000 units. “read more….”

“THIS WEEK’S HIGHLIGHTS”

Housing starts perk up

Housing starts showed welcome signs of improvement in May, rising to 128,400 annualized from April’s 117,600. The increase was broadly based across building types. Both urban singles starts and urban multiples starts rose 11.1% to 60.900 annualized and 46,900, respectively. Rural starts remained unchanged at 20,600 annualized units. The improvement was reasonably broad-based, with all regions posting gains except British Colombia. Ontario enjoyed the largest percentage gain, up 22%, with gains in the Prairies posting a 16.8% increase. Quebec and Atlantic Canada enjoyed more muted gains of 3.3% and 7.3%, respectively. British Columbia suffered a 5% decline in urban starts during May. The pick-up in starts is broadly in line with the forecast of an improvement during the latter half of the year compared to the weakness in the first half. It is expected that Canadian housing starts will average 141,000 in 2009 overall. As growth in the economy picks up in 2010, starts should improve modestly to 173,000, although this represents activity well below levels seen earlier this decade.

It was the worst of times

To be sure, the data reported for the first quarter of 2009 was dismal. Canada’s recorded its largest output loss since 1991, the U.S. economy registered its third consecutive quarterly decline with activity in the European and U.K. economies also shrinking substantially. To top it off, Japan’s economy shrank at a 15.2% annualized rate. In spite of the rash of bad news, investors gravitated toward the better news being reported. U.S. housing statistics showed stability in the pace of sales, the pace of job cuts moderated and consumer confidence picked up. In Canada, confidence rose as did the pace of home sales making the first quarter’s slump feel like old news. U.K. house prices have increased in two of the past three months, auto incentives appear to have put a bottom on sales and confidence has improved. Eurozone data proved a mixed bag with the unemployment rate hitting a 10-year high, but business confidence improving and order books growing. Investors took these reports as a signal that it is the beginning of the end for the Great Recession of 2009.

Is the end in sight?

The consensus is that the global recession began to lose momentum in the second quarter but still expect another round of negative growth rates to be reported. The global manufacturing ISM index recorded its fourth consecutive monthly increase in May and the services index averaged 45.3 in April/May, well above the first quarter’s 40.4. The levels remain unimpressive but signal a turnaround in sentiment, suggesting that the pace of contraction will be slower in the second quarter and that, if this trend persists, the global economy will likely be expanding in the second half of this year.

Silver Linings of Recovery in Sight

Canada’s housing market is humming along with sales activity increasing 11% from the previous month, the largest monthly gain in more than five years. Low mortgage rates, improved affordability and greater choice of inventory have helped more renters become buyers. With sales activity rising strongly and new listings trending downward, Canada continues to move toward balanced supply and demand conditions. Home building recorded its first broadly based increase since October last year, which is good news as this sector will hopefully cease to be such a drag on the economy.

The housing market was not the only bright spot – the Organization for Economic Cooperation and Development (OECD) said their composite leading indicator showed tentative signs of recovery in Canada. Their data indicates that Canada’s economy may be bottoming out and is likely to start heading up. Consumer confidence has been increasing for the last three months and currently stands at the highest level in 15 months.

The strengthening U.S. and international demand for manufactured and commodity-related products should help lift Canada’s economy. However, a strengthening Loonie could serve as a counterinfluencing factor.

The Numbers That Drive Real Estate

Home Sales (In Thousands)

Sales activity increased 11% from the previous month. This was the largest monthly increase in more than five years. 70% of local markets saw an increase in sales. Calgary, Vancouver, Montreal, and Toronto accounted for most of the increase.

Average Home Price In Thousands

Home prices increased 6% from the previous month but still remained slightly lower than the same time last year. Record home prices were seen in Saskatchewan, Manitoba, Quebec, and Nova Scotia.

Inventory (Sales-to-Listings Ratio )

The supply of homes continued to shrink. There were 21% fewer new listings in the market in April when compared to the same time last year. With sales activity rising strongly and new listings trending downward, Canada continued to move toward balanced supply and demand conditions

Sales-to-listings ratio is an indicator of price pressure in the home market. (Data released on May 15, 2009)

Source: Conference Board, Canadian Mortgage and Housing Corporation, The Canadian Real Estate Association

Mortgage Rates Average for: 25-Year Amortization, 5-Year Term

Mortgage rates stood at 5.25% last month. This was 1.4% lower than the same time last year and .2% below where it stood when the Bank made the latest rate cut on April 21.

It is, of course, important to note that these are the posted rates, and not the deepest discount rates available, which currently run approximately 1.5% below the rates above.

Recent Government Action

Government Rescues General Motors

A comprehensive restructuring plan was approved on June 1 after General Motors failed to get its bondholders on board.

While the additional details on the restructuring gets ironed out, the massive rescue plan by the Canadian and U.S. governments will yield a majority ownership in excess of 70% between the two governments. The $9.5 USD billion in aid from the Canadian government will translate into a 12% stake in the “New GM.” This represents the largest corporate rescue in the history of Canada.

Typically, financial institutions step in to provide a company with funds through the restructuring process, but with the trouble in the financial sector, no institutions took interest leaving it up to the governments to provide $40 USD billion on top of the $20 USD billion the company already received.

The massive intervention bodes well for Canadian interest in the company by ensuring that the interests of Canada receive formal representation, and it protects the company from liquidation, saving numerous Canadian jobs. This action intends to support the auto industry; however, the 12% stake pales in comparison to the 60% majority held by the U.S. government.

Here’s the full presentation (it’s best if you view it in full-screen mode):