Category Archives: debt management

When your mortgage is more than you can handle

On paper, you could afford your mortgage. Your lender even approved the paperwork. But now that you’re settled in your home, maybe you’ve incurred some unplanned-for monthly expenses, such as higher-than-planned utility bills, property taxes that have risen (as they tend to do), or increased insurance premiums, and find that you’re unable to make your mortgage payments. If you’re not sure what to do, the first thing is not to panic. All hope isn’t lost, and you don’t have to let your home own you. You do, however, have to confront the issue head-on in order not to lose control of your finances.

If you think your mortgage is too big, here are some options and avenues to consider going forward.

  1. Budget
The first solution is the most obvious: Cut back on other expenses to try and make up for the shortfall. If you got a mortgage without properly budgeting, then it’s better late than ever. Be honest with yourself and keep track of everything you spend for one month – or even better, categorize all of your spending that took place last month so you can get a jump-start on the process. Quicken, Mint, and YNAB (you need a budget) are popular tools for tracking your spending and creating a budget. By tweaking your lifestyle and spending habits, you might be able to close the gap between the amount of money that you need for your mortgage and housing-related expenses and how much you’re spending elsewhere.

 

  1. Refinance
Refinancing is when you go back to your lender (or a new lender) and renegotiate your mortgage contract, based on your current balance and the current interest rates, before your mortgage term has expired. Note that if you refinance, you’re almost certainly going to end up paying a penalty for breaking your mortgage contract, even if you stay with the same lender. But the upside is that if you refinance at a lower interest rate than the one that’s currently being applied to your mortgage, then you can save money on your monthly payments. Another option would be switching from a fixed rate to a variable rate mortgage during a refinance, since variable rate mortgages tend to have lower interest rates than fixed mortgages. But since the interest rate on your mortgages fluctuates with the market rate, this tactic could also end up backfiring on you if interest rates go up; you’ll be forced to pay the higher interest rate and payments could end up being higher than you were previously paying. Refinancing can also be used as a tool in conjunction with budgeting, so that you withdraw some of the equity in your home to consolidate and get on top of your debt while better managing your cash flow going forward.
  1. Sell, sell, sell
It is always an option to sell your house and get a smaller one. While selling your home and pocketing the profit may seem like a good idea, the profits might not be as big as you’d expect. Between land transfer taxes, the penalty of breaking the mortgage, fees for real estate agents, and other selling expenses such as staging and/or making small repairs, you may find that your profits will be eaten into at such an extent that you can’t sell your house while generating enough cash to pay off the mortgage. Reasearching your housing market and having a frank conversation with a realtor when it comes to how much you could realistically expect to get for your home will be a big factor in determining whether or not you should sell, as well as using online calculators so that you know how much those other incidentals will impact your bottom line.

 

  1. Rent it out
Renting often gets a bad rap as the doomed fate of the poor, the irresponsible, or the nomadic. But the thing is, it’s a fiscally responsible option for many people. If your housing market isn’t favouring sellers, or you aren’t getting any response to your house being on the market, considering whether it may be an option to rent your property to a tenant and live in a less costly option, whether that be smaller or located in a less desirable area. The sale and rental markets are related, so what’s happening in one will impact the other. If your area is experiencing a slow housing market and fewer people are buying homes for whatever reason, then there may be more people who are renting, or open to the idea. Ideally, your income from the rental will cover the costs associated with your home, and all you’ll have to pay for is your new rent, which you would find at an amount that you could actually afford.
  1. Get a private loan
This is not a fail-safe option and the private lending space isn’t for undisciplined borrowers. That being said, if you have a plan, a private loan can be a good way to consolidate other high-interest debt that could free up some money that could go toward your mortgage payment if you’re suffering from a temporary setback such as making ends meet during a period where you had a loss of income, or went through a divorce.
  1. Talk to your mortgage broker
It’s all about knowing your options in this situation, and whether you want to refinance your mortgage, switch lenders, sell your home, you need to know exactly what each option is going to mean in terms of your current mortgage, which means you need to know how much the penalty is going to end up costing you in the long run. Remember, talking to your broker is free, and even though they’re not a financial planner or advisor, they can advise you as to what loans and mortgages would work best for you in your current situation.

Whatever you decide to do, you do have options. They may not always be the best options, but there are ways for you to get your head above water, even if your mortgage is too big for you. If anything, once you get on top of your situation or the next time you buy a house, you’ll know better how to anticipate your true expenses and budget for them going ahead.

Source: WhichMortgage.ca By Kimberly Greene | this page was last updated on the 25 Jan 2017

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Nearly half of homeowners unprepared for job loss or other emergency

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

An emergency fund is meant to be there in times of need, but a new survey suggests nearly half of Canadian homeowners would be ill prepared for a personal financial dilemma such as job loss.

The poll released Thursday by Manulife Bank found that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent admit to not putting away any funds and nine per cent only have access to $1,000 or less.

The remainder of those surveyed have up to $10,000 saved, with the average amount being $5,000.

Manulife Bank chief executive Rick Lunny says not having three to six months of expenses set aside can lead to desperation if a situation arises where you need to access money right away.

“The risk here is when they don’t have that money, and an unexpected event happens like you need a new furnace or a car repair, many of these people don’t have a choice but to lean on high interest cards,” he said.

Lunny noted that instead of taking advantage of the current low-interest rate environment to save money, the poll suggests that many homeowners are using it to buy more expensive homes.

“They’ve taken on large mortgages and as a result of that, they’re stretched in many ways,” he said. “Because of that, maybe they haven’t had the financial discipline to put aside rainy day money.”

Manulife says among those polled, homeowners had an average of $174,000 in mortgage debt, with an average of 28 per cent of their net income going toward paying off their home each month.

About half (46 per cent) of those polled say they would have difficulty making their monthly mortgage payments in six months or less if their household’s primary income earner lost his or her job.

Sixteen per cent say they would have financial difficulty if interest rates cause their mortgage payments to increase.

Mortgage data has been a hot-button topic in recent months as the federal government takes steps toward reducing the risks in the Canadian housing market, particularly in major cities like Toronto and Vancouver.

Earlier this month, Finance Minister Bill Morneau announced that stress tests will be required for all insured mortgages to ensure that borrowers would still be able to make their mortgage payments if interest rates rise or their financial situations change.

Last year, Ottawa raised the minimum down payment on the portion of a home worth over $500,000 to 10 per cent.

Lunny applauded the changes but says it doesn’t change the financial situation of current homeowners, who may already find it difficult to make mortgage payments.

The poll by Environics Research was conducted online with 2,372 Canadian homeowners from June 28 and July 8 of this year. Survey participants were between the ages of 20 to 69 with household income of $50,000 or more.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.

Source: LINDA NGUYENTORONTO — The Canadian Press Published Thursday, Nov. 24, 2016 

The poll released today by Manulife Bank finds that 24 per cent of those surveyed don’t know how much is in their emergency fund, 14 per cent have not put away any funds and nine per cent have access to $1,000 or less. (GETTY IMAGES)

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It won’t take much to drive Canadian borrowers over the edge, new study says

There are more than 700,000 Canadians who might be watching the next Bank of Canada decision very closely, because even a modest interest rate increase could push them over the financial edge.

A new study out Tuesday from credit agency TransUnion shows that of the 26 million credit-active Canadians in the country, 718,000 can’t absorb a 25-basis point increase or they won’t have enough cash flow to cover their debts. Raise rates one percentage point, something not likely to happen overnight, and 971,000 Canadians end up in a cash crunch.

The next interest rate announcement is not due until mid-October but the consensus among economists is there will not be a rate hike until the third quarter of 2017. That may be part of the problem, since consumers have come to expect rates will never go up and are now borrowing based on a prime lending rate of 2.7 per cent.

“I would say for five or six years interest rates have been so low, a lot of these consumers look okay because of the low rate environment. This is one of the things we are looking at,” said Jason Wang, director of research and industry analysis with Chicago-based TransUnion. “If everything changes and interest rates are higher, and they have to pay more on a monthly basis back to lenders, they may not be able to handle (an increase).”

The report looked at so-called super prime customers — the people with the best credit and scores in the 830-900 range — who make up the largest segment of the credit-holding population unable to absorb a small increase. Of super prime customers, TransUnion says a 25 basis point increase to interest rates would cause cash-flow trouble for 239,000. Only 101,000 Canadians borrowing with sub-prime ratings, in the range of 300-599, would face the same cash crunch under those circumstances.

Wang said the super-prime customers are far more leveraged and therefore more vulnerable to an interest rate increase. If rates rose one percentage point, 298,000 super-prime customers would face cash flow problems.

On average, credit-active Canadians carried 3.7 credit products, TransUnion said. The study focused on two major types of debt that carry variable rates, including lines of credit and variable-rate mortgages.

The message to consumers is to pay down debt before interest rates start to rise, while issuers need to look at their books.

“Take a look at their prime- and super-prime customers to see if they have a problem, because these are the people who will be surprised,”  Wang said. “We don’t want creditors to be surprised.”

Laurie Campbell, executive director of Credit Canada, said high quality customers have been building up debt because they’re attracted to low rates that never seem to rise.

“There is an assumption that those with better income and good (credit ratings) are in good financial shape,” Campbell said. “It’s not the case at all. We see people in our offices all the time that should be managing well that are not due to a number of factors. One is over extension, they’re biting off more than they can chew.”

Source: Financial Post Gary Marr | September 13, 2016 | Last Updated: Sep 13 8:43 PM ET

 

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Not All Debt is Bad

Not All Debt is Bad

Not all debt is bad. When you distinguish between credit used to fund the purchase of something that will increase your wealth and debit created for disposable items, you are empowering yourself to make informed financial decisions.

Why is referring to credit use as “bad” keeping you locked in debt? Judgments like this will translate back to yourself and you will end up feeling like you are a bad person with no discipline or self-control. This sort of language and self-talk will end up creating a self-fulfilling prophecy – unless you can learn to turn your view around and use the debt as an opportunity to reflect on past expenditures you have made.

Things to consider are:

  1. Why was the expenditure made?
  2. How much was spent?
  3. Over what time period were the expenditures made?
  4. What can you do about it?

 

And, at the same time, always show gratitude for all the enjoyment you have received from the items and experiences that were purchased on credit and have created the debt. Look for ways to turn the debt into credit that will up your financial position.

For more information on debt solutions, contact the Ray C. McMillan Mortgage Team

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Should You Sell Your Home to Pay Off Debt?

for-sale-sign-house-home

Home prices have literally gone through the roof in Canada in recent years. If you’re lucky enough to have entered the market a few years ago, you’ve built up some equity. But what if you have other, not so good debts, like credit cards, overdrafts and tapped out lines of credit? How should you use the equity in your home to deal with this debt?

If you do have equity in your home, you have three potential options to pay off excess unsecured debt:

  • Sell your home, cash in the equity and pay off your debt.
  • Use the equity in your house to support a debt consolidation loan to amalgamate multiple old debts into one new, hopefully lower cost, debt.
  • Depending on how severe your debts are, consider something called a consumer proposal.

Each alternative comes with its own pros and cons and choosing the best alternative means doing a cost-benefit comparison based on your individual situation. Let’s look at some of the considerations.

Can you afford to maintain your home?

The very first step is reviewing your budget to see if you can afford the ongoing costs of keeping your house. If your unsecured debts came about because of other spending problems or you were out of work temporarily, but things have returned to normal and you expect you can now keep up with your mortgage payments, selling your home may not be the best option.

If, however, your home is one of the main reasons your budget is now out of balance, perhaps because your income was permanently reduced due to retirement or a job change, then you need to make the hard decision to sell and downsize. Dealing with old debts, while continuing to pile on more to make ends meet each month, doesn’t make long-term sense.

Will you realize enough to pay off all your debts?

Let’s assume you can afford to keep your home. The next question becomes should you sell anyway in order to pay off your other debts and effectively start over? This may only make sense if you truly are able to begin again without any other unwanted debt.

If you owe $50,000 in credit card debt and only have $35,000 equity in your home, selling your home won’t solve all your problems. Once again, you need to look at your budget and decide if selling your home and relocating (you have to live somewhere) will save enough that you’ll be able to repay the additional $15,000 you owe in a reasonable period of time.

Interestingly, this is the same analysis you need to make when considering a debt consolidation loan. If taking out asecond mortgage on your home doesn’t consolidate all of your existing unsecured debts and balance your budget, then it might not be the best choice.

Are your debts too large to deal with on your own?

Finally, if selling your home (or taking out a debt consolidation loan) won’t cover all of your debts, and repaying the excess will take too long, then it’s time to consider options that will help you eliminate all of your debts now.

If you have equity in your home, a consumer proposal filed with a bankruptcy trustee is a way to use that equity to negotiate a settlement agreement with your creditors. In a consumer proposal, you’ll end up paying less than you owe, yet all of your unsecured debts are eliminated.

So in our original scenario you may be able to negotiate a payment plan with your creditors to pay them $35,000 to $40,000 and walk away from $50,000 in debt. In a consumer proposal, you can keep your house if you decide you can afford to or you can sell your home and make a lump sum settlement offer. The point is, your debts are eliminated no matter how much equity you have. So if you owe more than the equity in your home, this is a great option to consider.

The best approach is to talk with a professional such as a bankruptcy trustee. They can help you review the numbers and choose the right solution for you.

 

Source: RateHub.ca by Doug Hoyes November 13, 2015

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Can I Just Walk Away From My Debts?

DEBT

I’ve had a few people say to me recently “If you have debt, just walk away; the banks won’t do anything. My friend stopped paying, and nothing happened to him. Don’t bother with credit counselling, or a consumer proposal, just walk away.” Does that strategy actually work?

The answer depends on your situation.

In some cases the “do nothing” strategy, or walking away, is a viable option.

If you owe money to a bank, they want to be repaid. If you don’t pay them, they will follow a standard sequence of events to collect their money.

The first month you miss a payment they will include a “friendly reminder” at the bottom of your statement, saying something like “this is just a friendly reminder to make your payment; if you already made your payment, please disregard this notice.”

By the second month, the note on your statement will be less friendly: “We will suspend your account if you don’t pay.”

By the third or fourth month, collection calls will start, and you may get threatening legal letters. Eventually your account may be turned over to a collection agency, and then the phone calls and letters become even more intense.

Ultimately, if you don’t pay, the bank has three options:

  1. Stop collection actions and write off your account;
  2. Continue collecting through a collection agency;
  3. Take you to court to get a judgement, which may lead to a wage garnishment.

So when would a bank simply give up? When they have no reasonable hope of collecting from you. That may happen in a variety of situations, including when:

  • The bank doesn’t know how to contact you, because you have moved and they don’t have your address or phone number;
  • They don’t know where you work, so they can’t garnishee your wages; or
  • The bank knows that you have no wages to garnishee, perhaps because you are receiving a pension.

A creditor can only garnishee your wages if you have wages. If you are unemployed, or your income is from a source other than wages from employment, such as a pension, then there are no wages to garnishee.

So the answer to the question “can I just walk away from my debts?” is “yes”, but only if you are not worried about the repercussions of walking away. If you have no assets to seize, no wages to garnishee, and you are not concerned about a low credit score, walking away is a viable option.

DEBT

However, if you have a job, or expect to have a job in the near future, or if you have assets, walking away may not be your best option, because you put yourself at risk for a wage garnishment.

If you owe money to Canada Revenue Agency and have a job, or own a house, or have a bank account, ignoring them is very dangerous. CRA can freeze a bank account or garnishee your wages without a court order.

Here’s my advice: if you have debts, attempt to work out payment arrangements directly with your creditors. They may give you a break on the interest rate or stretch out your payments to allow you to pay them in full. If you can’t make a deal with them, and if you have more debt than you can repay, don’t wait until legal action starts. A licensed insolvency trustee will provide you with a free initial consultation to review all of your options, and they can tell you if walking away is a good option.

If you are 80 years old, and your only income is CPP and OAS, and your only debt is an old cellphone bill from five years ago, walking away is probably your best option. If you are working and can’t pay, a consumer proposal or bankruptcy may be a better option than ignoring the problem and hoping that the problem goes away.

Source : Huffington Post   Licensed Insolvency Trustee, Chartered Accountant

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Retiring with a mortgage? Why you might want to think twice about that

When it comes to opining on seniors carrying debt into retirement, I’ll state upfront my personal bias that anyone with credit-card debt — or even mortgage debt — has no business fantasizing about retirement. To me, it’s simple: if you have debt of any kind, you keep working until it’s all discharged. As I have written elsewhere, I believe the foundation of financial independence is a paid-for home.

That said, I recognize there’s a large segment of the population not fortunate enough to have a paid-for home, corporate pensions or financial assets like RRSPs and TFSAs. I personally know seniors who still rent and have no financial safety net. Some may have to resort to payday loans just to get by until the next month’s government-issued Canada Pension Plan, Old Age Security or Guaranteed Income Supplement cheques arrive.

Doug Hoyes, president of Kitchener-based bankruptcy trustees Hoyes Michalos & Associates Inc., profiles senior debtors every two years in his Joe Debtor study. The data are shocking. He defines seniors as 60 or older, so many are baby boomers either in retirement or on the cusp of it. (The oldest boomers, born in 1946, are now 70, while the youngest boomers, born in 1964, are 52 and presumably still working full-time.)

Senior debtors make up 10 per cent of Hoyes’ 2015 study, up from eight per cent four years ago and owe an average of $69,031 in unsecured debt, higher than any other age group. Nine per cent borrow against their income — often pension income — by resorting to payday loans.

Payday loans are, in my opinion, almost usury — defined as debt instruments charging more than 60 per cent in interest a year. However, because the loans are only a few weeks in length (literally, until the next payday), the lenders can charge up to $21 for every $100 borrowed in Ontario, which if paid over a year would be interest of 546 per cent, Hoyes says.

Fifty three per cent of these senior debtors live alone and often cite illness or injury as a cause of their financial troubles. Among bankrupt seniors, nine per cent had payday loans. In some cases, their adult children are making financial demands and they’re too embarrassed to admit they have few alternative resources.

At the other extreme are the fortunate, wealthy boomers with paid-for homes, large defined-benefit pensions and maxed-out registered and even non-registered (taxable) investments. For them, says Emeritus Retirement Solutions president Doug Dahmer, the biggest expense will be tax, something that must be planned for well in advance. In this case, borrowing may turn out to be tax efficient.

Then there are the rest of us: perhaps with no large company pensions, modest financial assets and a home with only some equity in it, which may be a tempting source of future funds in retirement or semi-retirement.

This middle group is often torn between paying down the mortgage before retiring, or capitalizing on low interest rates to take a chance on building their financial nest eggs in the stock market.

Last July a CIBC poll found that, on average, Canadians expect to be debt free by age 56, although some are indebted well into their sixties. Even in the 45-plus cohort, more than 68 per cent are in debt, including 31 per cent who still have mortgages. In 2013, CIBC found 59 per cent of retirees were in debt.

But this may not be necessarily a bad thing, argues CIBC Wealth tax guru, Jamie Golombek. “There’s no harm in having debt if it’s for an appreciating asset. If you’re in your home for the long term and borrowing at low interest rates, it’s not a big problem. The problem is when you run out of cash flow to service the debt.”

Interest rates are near 60-year lows: posted five-year mortgage rates are under three per cent at most financial institutions (and under four per cent for 10 years). Of course, unless you lock in, there’s no guarantee rates won’t rise to more uncomfortable levels.

In a paper he wrote for CIBC last year (Mortgages or Margaritas), Golombek suggested the zeal to pay down debt could put some people’s retirements at risk. It was written in response to another CIBC poll that found 72 per cent of Canadians prefer debt repayment over saving for retirement. He found that if you can get 6 per cent annual returns in a balanced portfolio of investments, the net benefit was almost double that of paying down debt.

Back in 2012, BMO Financial Group tackled the same issue, noting that rising home prices meant real estate formed a disproportionate amount of couples’ net worths. This tempts some to tap into their home equity in retirement in order to overcome their past failure to save. As boomers become net sellers of homes instead of driving up prices, BMO said home prices could fall by one per cent per year. Downsizing, renting or moving to a small town are all ways to access some of the equity in your home.

Still, Hoyes has seen enough senior debt to argue against taking on more. “Low interest rates are great as long as you can make payments, but what if you lose your job, get sick or divorce? The fact moderate interest rates are only three per cent is irrelevant if there’s no money coming in. When your income becomes fixed, your expenses have to become fixed, but it’s hard: you can’t control the price of gas or car insurance.”

Personally, I like to have enough Findependence that you reach what Dahmer terms the “Work optional” stage. It’s about being in control of your days, Hoyes says, “If you have debt when you retire you are not in control of your day.”

And of course, medical expenses can creep up. It’s not as bad here as in the United States, where medical costs can have catastrophic consequences, but “In Canada medical expenses are insidious,” Hoyes says, “It’s a lesser amount, but creeps away and boomers are more likely to get whacked.”

One option, if available, is to work part-time in retirement. An analysis by Toronto-based ETF Capital Management found that if a retiree earns just $1,000 a month extra in consulting income or a part-time job, a nest egg’s depletion slows dramatically. For couples, if both partners earn that much, the financial picture is rosier still.

This may or may not be “optional” work. BMO found 29 per cent of Canadians expect to delay retirement and work part-time in retirement because of savings shortfalls. For them, BMO says, tapping home equity constitutes “Plan B,” one that 41 per cent of Canadians are considering.

But avoid reverse mortgages, Dahmer counsels. He says it’s more cost efficient to use a secured line of credit against the house. Draw funds only if needed, but set it up while you’re still working and the bank thinks you’re a good credit risk.

Dahmer thinks flexible use of debt through a line of credit is a sound strategy for smoothing spending in peak years, especially if your main income is from registered assets. “You’re far better off paying 2.5 to 3.5 per cent in interest for a few years than forcing yourself from a 33 per cent to 42 per cent marginal tax bracket, not to mention Old Age Security being clawed back.”

The savings can be in the hundreds of thousands: “Retirement is the one time in life that strategic tax planning can make a significant difference. That’s because of the many different places you can source cash flow from, each with its own distinctive tax implications.”

Source : Financial Post Jonathan Chevreau | March 22, 2016 | Last Updated: Mar 23 6:56 AM ET

Jonathan Chevreau is the founder of the Financial Independence Hub 

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