“American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
Rep. Ayanna Pressley says she is “thrilled” that the House of Representatives passed her bill to reform the credit report system, though the legislation’s future in the Senate is unclear.
The House approved the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency (CREDIT) Act on a mostly party-line vote Wednesday afternoon.
Pressley — who has championed often-arcanefinancial reform bills during her first term in Congress — says the legislation would address a “fundamentally flawed” system that can impede upward economic mobility in a country where “our credit reports are our reputations.”
“When credit reports determine where you can live, work and how much you will have to pay for everything from a car to a college degree, consumers deserve a system that ensures equity, transparency and accountability,” the Massachusetts congresswoman said in a statement. “American families are finding themselves trapped in cycles of debt, simply for trying to afford basic needs like healthcare and education.”
The Comprehensive CREDIT Act includes measures to make it easier for the estimated 20 percent of consumers who have a “potentially material error” on their credit report to seek corrections; limit the use of credit scores for employment purposes; expand the opportunity for student loan borrowers to improve their credit scores; restore credit to victims of predatory agencies; ban the reporting of debt incurred from “medically necessary procedures” and delay the reporting of other medical debt; shorten the time that most adverse credit information stays on a report from seven years to four years, and from 10 years to seven years in the case of a bankruptcy; and bolster the Consumer Financial Protection Bureau’s oversight of the industry.
According to CFPB data, the watchdog agency has received more than 326,000 complaints against credit reporting agencies since 2012, which accounts for nearly 22 percent of the total complaints filed during that time period.
According to Pressley’s office, the Comprehensive CREDIT Act comprises tenets of several other bills introduced by fellow members of the House Financial Services Committee. However, the Boston Democrat authored the student loan-focused section of the bill, which would:
Establish a credit rehabilitation process overseen by the CFPB for borrowers facing economic hardship to repair their credit profile.
Prohibit credit reporting agencies from including any information on a credit report relating to a delinquent or defaulted student loan after the borrower makes nine on-time monthly payments.
Provide a grace period for borrowers seeking rehabilitation but experiencing significant financial hardship or other extenuating circumstances such as certain military deployments or residing in an area impacted by a major disaster.
Require private lenders offering repayment plans to borrowers seeking rehabilitation to offer affordable monthly payments and additional assistance.
Student debt has become an increasing burden for students in Massachusetts. A study in 2018 found that the average debt load for Bay State graduates increased by 77 percent between 2004 and 2016, faster than in any other state in the country except Delaware. According to Pressley’s office, more than 855,000 borrowers owed a total of $33.3 billion in student debt last year in Massachusetts — and nearly 100,000 are behind on their loans.
“Even if we wipe out all student debt tomorrow, the devastating impact on consumers’ credit would remain for years to come,” Pressley said in her speech. “For that very reason, we must give folks a real chance at recovery and repair.”
The bill passed the Democrat-controlled House by a 221-to-189 margin. With the exception of two moderate Democrats who joined Republicans to vote against the legislation, the vote was divided by party lines.
For the legislation to proceed any further, Democrats will likely have to wait until at least another election. Sen. Mitch McConnell, the Republican-controlled Senate’s majority leader, has repeatedly ignored the hundreds of bills passed by House Democrats.
Massachusetts state lawmakers have also recently proposed new protections for student borrowers in the wake of relaxed federal oversight under President Donald Trump.
It was his fourth in 10 years, during which time he had relied on Canada’s insolvency system to rid him of more than $100,000 in debts.
This time, the buck was going to stop. The judge overseeing the case had had enough. Nantel, she ruled, did not deserve yet another fresh start.
“He’s shown no reluctance of using bankruptcy to be freed from his debts,” the judge, known as a registrar, wrote in a 2012 decision. “His past conduct demonstrates a contempt for the rights of his creditors.”
Discharging Nantel of his fourth bankruptcy — liberating him of the debt that led him into insolvency — would undermine the integrity of Canada’s bankruptcy system, the registrar said. She denied his application.
Nantel, who refused to comment for this article, persisted.
Four years after the 2012 ruling, Nantel, now working as a mechanic and living 120 kilometres east of Montreal, went before a different registrar and received a discharge from that same bankruptcy.
And eight days after that, he declared bankruptcy for a fifth time, owing more than $37,000 in new debts.
Nantel is one of a staggering number of Canadians who are washing themselves of their debt by re-using a bankruptcy system meant to rehabilitate honest but unfortunate debtors, a joint investigation by the Toronto Star and La Presse has found.
Bankruptcy system insiders and observers are surprised at the magnitude of the nationwide problem revealed in the investigation’s data analysis.
One in five Canadians who filed bankruptcy in 2018 was doing it for at least the second time. That works out to 11,500 debtors who filed their second, third, fourth or even fifth bankruptcy, according to data obtained from the Office of the Superintendent of Bankruptcy.
“One fifth-time bankrupt is probably one too many,” said Thomas Telfer, a law professor at Western University who has authored the country’s most detailed research on repeat bankruptcies.
“It shows that the bankrupt has not received the message.”
In cases of repeat bankruptcies, the courts have said focus is expected to shift from rehabilitating a debtor to protecting the public and the system from being abused.
Yet, despite the courts’ stern rhetoric, government data shows the vast majority of completed proceedings end with the person released from their debts.
The Star and La Presse have interviewed dozens of debtors and insolvency experts, including the trustees that administer bankruptcies and retired court registrars who previously presided over bankruptcy cases.
Many repeat bankrupts are people marred by bad luck, their lives sideswiped by job loss, divorce, illness or other tragedies that catapulted them back into insolvency.
Others, however, rack up the same kinds of debt over and over, then turn to bankruptcy for what the courts have called a “fiscal car wash.”
“In some segments of society, it’s become almost a game. People take advantage of the system and they take advantage of the leniency of the registrars,” said Yoine Goldstein, a retired Canadian senator and lawyer who led a task force advising the government on potential reforms to Canada’s insolvency laws.
Unpaid taxes owed by repeat bankrupts make up a portion of the nearly $4 billion the Canada Revenue Agency has written off since 2009 because of consumer and commercial insolvencies. In Quebec, the provincial tax agency has lost nearly $2 billion to insolvencies in the last five years alone.
Meanwhile, credit card lenders absorb the cost of bankrupts who do not pay their bills by charging high interest rates to their customers who do pay their debts.
The Star/La Presse investigation has also found the problem of repeat bankruptcies is greater in Quebec, home to an overwhelming number of the country’s third-, fourth- and fifth-time bankrupts.
In some cases, such as Nantel’s, four- and five-time bankrupts have shed their debt more quickly and easily than had it been their second bankruptcy.
When a person declares bankruptcy, a trustee sells whatever assets are available and distributes the proceeds to creditors (some assets, such as clothing and registered retirement savings that are more than one year old, are protected).
In some cases, when the bankrupt’s income exceeds what a government formula deems necessary to maintain a reasonable standard of living, the debtor must make “surplus income” payments, increasing the amount of money creditors recoup.
The bankruptcy is over when the person gets discharged — a release from the legal obligation to pay back what was owed, though it does not cover certain debts such as child support or alimony.
Unless someone such as a creditor opposes, a first bankruptcy is automatically discharged in nine months or 21 months. The second bankruptcy can be automatically discharged in two years or three years.
Subsequent bankruptcies go to court, where the judge can grant a discharge or refuse it. If granted, the discharge is completed after a delay, known as a suspension, or with conditions, such as the debtor having to prove he is up to date with his taxes. Often, a discharge comes with both a suspension and conditions.
Although the total number of consumer bankruptcies is going down year over year, the percentage that are repeat bankrupts has steadily climbed.
Third-time bankrupts have become common in some provinces. Fourth and fifth bankruptcies, once almost unheard of, are now “a scourge,” registrars have said, and “a clarion call to systemic integrity and to the court’s role in it.”
Repeat bankrupts include real-estate agents, roofers, restaurateurs, tax lawyers and drywallers.
With each bankruptcy, they are required to take two financial counselling sessions. Some debtors, however, take away the wrong lesson.
“They go through bankruptcy and they learn, frankly, how easy it is and how forgiving it is. Then think, ‘Gosh, why don’t I do it again?’ ” said John Owen, whose previous business helped credit lenders pursue claims against insolvent consumers.
Owen testified in 2003 before a Senate committee reviewing Canadian insolvency laws, and he warned of the country’s disproportionately high rate of repeat bankruptcies.
At that time, about 10 per cent of bankruptcies filed were repeats. That rate has now doubled.
“There’s a cost to it. No question. There is a societal cost,” he said.
It’s unknown how much lost tax revenue can be attributed to repeat bankruptcies. One thing, however, is clear: The government, sometimes, only recoups pennies on the dollar, if it gets anything at all.
Three-time bankrupt Jacques Bélanger has racked up mountains of tax debt to the CRA and Revenue Quebec. After the Laval man’s meagre assets were picked over in his most recent bankruptcy, filed in 2014, the CRA, owed more than $101,500, received just $59.20 — less than Belanger spent a month on cigarettes.
“I want to make clear that I never exploited the system. I was just unlucky,” Bélanger said in an interview.
There are few debts more important than the payment of taxes by those enjoying a good income, said registrar Nathalie Champagne in 2017 when faced with Charles Rotenberg, a former Ottawa tax lawyer. Rotenberg, who surrendered his licence after the law society found he misappropriated a client’s funds, was on his third bankruptcy, this latest leading the CRA to write off $313,000. “The Bankrupt before me has enjoyed a good income and he has not paid his fair share of taxes which is unfair to the rest of the tax-paying public.” She refused his discharge.
Rotenberg travels every year and lives in a five-bedroom house bought by his wife and works as a consultant, Champagne noted in her decision, adding “his life and lifestyle have been seemingly unhampered by his third bankruptcy.”
Rotenberg told the Star he drives a Honda. The other car in the driveway, a dark grey 2018 Cadillac sedan, is registered to his wife, vehicle records show. He said that when he travels, it is to visit family. The money that the law society found he misappropriated has been paid back, he said. His consultancy’s website says he helps clients with “Dispute resolution with the Canada Revenue Agency.”
Rotenberg said he assumed substantial liabilities from a business partner who had been managing the books which, coupled with serious health problems, left Rotenberg unable to work and continue to pay creditors and led to his third bankruptcy. He said the court will not let him re-apply for his discharge until 2021.
The courts can refuse a discharge when the debtors’ behaviour has been particularly reprehensible.
In 2015, a Quebec court decided it was the best way to handle the fifth bankruptcy of Stéphane Flynn. In an interview, Flynn blamed his bankruptcy on runaway costs in his construction business and clients who didn’t pay on time. In reviewing the case, the judge saw a man with more than $500,000 in debts who treated bankruptcy as a way to escape his debts.
“It is extraordinary that he has been allowed to do so multiple times without opposition to his release,” registrar David Cousineau wrote in his decision to refuse Flynn’s discharge.
Except it was not extraordinary. Discharge has become routine for repeat bankruptcies.
Of the 395 proceedings involving fourth- and fifth-time bankruptcies that were completed between 2011 and 2018, just 21 resulted in a discharge being refused, according to federal data. That’s five per cent.
In every other case, registrars gave a conditional or suspended discharge. (The majority of fourth- and fifth-time bankruptcies filed during these years have not yet had a discharge ruling, according to the data).
The willingness to grant discharges marks a notable shift from how courts historically treated repeat bankruptcies, their decisions guided by an often-quoted judgment that a “third bankruptcy is one too many.”
“Third-time bankruptcies are of grave concern, often demonstrating a degree of irresponsibility that justifies simply refusing a discharge,” Manitoba Justice Colleen Suche said in 2012 in upholding a decision to deny a three-time bankrupt a release, forcing him to re-apply in a year.
Michael Bray, a retired registrar in New Brunswick who presided over insolvency hearings from 1999 to 2013, said the stigma surrounding bankruptcy has diminished. He said stiff sanctions can be used to dissuade a debtor from returning to insolvency.
“It used to be that most people that came for their first-time bankruptcy…a lot of them never wanted to be here again. I think that feeling is gone now,” he said.
“If the courts don’t impose a good sanction, then it’s not difficult to be a three-, four- or five- (time bankrupt).”
Canada’s Superintendent of Bankruptcy, whose office regulates and supervises the insolvency system, would not be interviewed for this article.
In written answers, her office said insolvency laws contain “safeguards against potential abuse,” and the decision to discharge a debtor with three- or more- bankruptcies is a matter of judicial discretion based on the circumstances of each case.
Some trustees say the court’s shift stems from repeat bankruptcies becoming more common and, as their shock value dissipates, registrars are growing more sympathetic to how financially tenuous many Canadians have become.
Another theory is that registrars, aware that creditors almost never attend court to oppose discharges, are asking: If the people owed money don’t care enough to be here, why should I dole out a harsh penalty?
“That was the frustrating part of that job. You’re supposed to be somewhat of a gatekeeper but no one is complaining,” said Scott Nettie, a registrar in Toronto bankruptcy court from 2005 to 2012 with a reputation of coming down hard on debtors who misused the system.
“I know there are registrars across the country who, in those situations where no one is there (opposing discharge) and no one is complaining, they’re like, ‘go forth and sin no more,’ ” Nettie said. “Then there are others, and I was one of these, who struggled with: ‘But it’s not right.’ ”
Among the least engaged creditors, according to Nettie and other trustees and registrars, are credit card companies.
Credit lenders rarely oppose a discharge and once discharged, many repeat bankrupts have little trouble securing more credit.
A Nova Scotia man filing his fifth bankruptcy had amassed more than $20,000 in credit card debt, even though two of his earlier bankruptcies remained on his credit report. A businessman from Collingwood, Ontario, had 10 cards in his wallet and owed more than $64,000 when he filed his third bankruptcy in 2014.
Those credit card companies may only recover a portion of what they’re owed.
“They don’t care,” said Nettie. “They’ve already costed the price of losing that part of the business completely into what they charge the rest of the paying customers. Why would they pay good money after bad to pay someone to come (to oppose in court).”
A spokesperson from the Canadian Bankers Association said the country’s banks are prudent lenders that only offer credit to borrowers they believe can and will repay the loan.
Losing money to a four-time bankrupt was not something Dieter Gauger could easily absorb. In 2013, Gauger, a retired millwright, and his wife Edith hired a Hamilton contractor to renovate their Stoney Creek townhouse.
The contract said the work would cost $65,000. But after collecting $60,000, the contractor, Stephen Monahan, left the house unfinished and unliveable, Dieter said. The Gaugers drained thousands from their retirement savings to pay someone else to complete the renovations while they stayed in a Super 8 Motel. The Gaugers took Monahan to court, where in 2015, they got a default judgment for nearly $36,400.
But Gauger does not expect to see any of that.
Two months after the court order, Monahan filed for bankruptcy, his fourth. Described by one registrar as “a menace to credit system,” Monahan told the court his first three bankruptcies were his own fault, the consequences of poorly managing his business. His latest, with nearly $93,000 in debts, was the result of cancer, he said. He said his prognosis is grim.
“I’m very sorry to the people I owe money to and I’m sorry for my failures,” he told the court at his October hearing. Citing his poor health, the court issued Monahan a suspended discharge. He can be free of the debts as early as summer 2020, as long as he pays roughly $1,600 in outstanding administration costs.
For Gauger, it doesn’t feel just.
“I lost $36,000,” the 76-year-old Gauger said. “The system worked for Monahan but not for me.”
The problem of repeat bankruptcies is particularly prominent in Canada’s eastern provinces.
Since 2011, Nova Scotia has had the most repeat bankruptcies per capita in the country with 75 for every 100,000 residents — more than double the national average.
The high rates are likely fueled by a combination of low wages, an unstable job market and a high cost of living, especially in places like Cape Breton, said Rob Hunt, a trustee with Grant Thornton based in Nova Scotia.
“We find people have then relied on credit to bridge their income,” he said. “People finally get to the boiling point where they’ve exhausted their credit and they can’t afford to keep making the monthly payments.”
More than half of the roughly 9,360 Canadians who filed their third bankruptcy between 2011 and 2018 lived in Quebec. For fourth-time bankruptcies, Quebec’s portion climbs to 74 per cent.
And of the 88 Canadians who declared bankruptcy for a fifth time, almost all of them — 90 percent — lived in Quebec.
Insolvency experts within Quebec say they are stunned by the numbers but offer a variety of possible reasons.
Quebec is the only province going back to the late 1980s that has consistently had higher rates of consumer bankruptcy per capita than the national average.
The province has among the lowest rates of disposable income per resident in the country, which could mean fewer Quebec debtors can afford to settle their debts through scheduled payments under a consumer proposal and instead opt for bankruptcy. A consumer proposal, another form of insolvency, is a settlement in which a debtor repays a percentage of what is owed and is an alternative to bankruptcy.
Research has found French-speaking Canadians scored lower on financial literacy than their English counterparts.
The Quebec numbers are also partially due to inconsistencies in the sanctions imposed on bankrupts from courthouse to courthouse and province to province.
How it is supposed to work is spelled out in the Bankruptcy and Insolvency Act. A first-time bankrupt will be automatically discharged after nine or 21 months, unless there is opposition. Changes introduced in 2009 allow for automatic discharges for unopposed second bankruptcies with a waiting time of two or three years. Subsequent bankruptcies must go to court where a judge decides on sanctions.
This is where the system’s consistency unspools.
In Toronto, trustees say the court will postpone the discharge hearing of a third-time bankrupt for at least three years, then delay a discharge for another nine or 12 months.
“The court is of the opinion that a third-time bankrupt shouldn’t be able to get out faster than a second-time bankrupt,” said trustee Mark Morgan from David Sklar & Associates.
But that’s not how it works across the country. In 2018, a labourer living in small-town Quebec was discharged from her third bankruptcy just two years after she filed it. A year later, she again declared insolvency, this time filing a consumer proposal.
Consumer proposals have overtaken bankruptcies as a preferred way to handle debt, particularly in provinces such as Ontario. However, the federal government says it does not track repeat proposals, meaning the rate of repeat insolvencies may be much higher than the data suggests.
The government’s 2009 changes also inadvertently softened oversight, shielding debtors from the scrutiny of the courts until they arrive before it for a third time, according to some trustees and one former registrar.
“This may signal that going bankrupt twice is not as serious as it is. This may be in part what’s led to an increase in recidivism,” Morgan said.
Joseph Cloutier is a 48-year-old drywaller in Toronto who, at his peak, could bring in $4,000 a week. But he never put money aside for taxes. When he filed his first bankruptcy in 2008, he owed the CRA $22,000; during his second, in 2011, he owed $60,000. He received automatic discharges both times.
In 2016, Cloutier again filed for bankruptcy. His CRA debt: $124,000.
“I’m terrible at managing money. I’ve been terrible all my life,” Cloutier said. “I’m one of these people with an addictive personality. If you’re going to give me a million dollars, I’ll spend it all by next week.”
In November, a Toronto court ruled that Cloutier could be discharged from his third bankruptcy in 15 months with conditions, including that he first pay the CRA debt that had been mounting since he filed his latest bankruptcy.
Law professor Thomas Telfer said the law should be tightened so cases like this, in which a second bankruptcy is filed within three years of the first one being discharged, do not qualify for automatic discharge. Instead, the debtor would go to court where a registrar can determine whether the debtor is honest but unfortunate or abusing the system.
A decade ago, trustee Mark Morgan co-wrote an article about “the revolving door of bankruptcy” and the rising rates of recidivism. Still, he says it “blows his mind” to learn from the Star and La Presse that 88 Canadians have declared bankruptcy five times since 2011.
“It shouldn’t be that easy,” Morgan said. “They’re basically thumbing their noses at the system. I know you can’t do anything to me because you haven’t the first, second, third or fourth time.”
His article outlined strategies to stem what he saw as a growing problem. They included more financial education for youth and new Canadians, more consistent sanctions and expanded counselling, as the two sessions required under the Act aren’t enough to fix “a lifetime of bad” financial behaviour, he said.
“Recidivism will continue to be a problem as long as society, creditors, the courts and the insolvency community allow it to be,” Morgan warned.
In May 2016, seven years after Morgan’s call to action, Kenneth Nantel was again seeking to get liberated from more debt.
It was Nantel’s fifth bankruptcy in 16 years, filed just eight days after he was discharged from his fourth. Much of the $37,000 he owed was to the government, and he blamed his money problems on a loss of income.
He was earning roughly $3,300 a month as a mechanic, enough for him to make surplus income payments to increase the amount of money his creditors would receive.
“If it was his second bankruptcy, the debtor would have to pay a total of $17,748 over 36 months,” Nantel’s trustee noted in his submissions.
Even though it was his fifth bankruptcy, the registrar ordered Nantel to pay only $5,916.
When reached by phone, Nantel refused to comment. “I’m not really interested in talking about what happened in the past,” he said before hanging up.
Nantel can be discharged from his fifth bankruptcy as early as September 2020.
Source: Toronto Star – JESSE MCLEANDECEMBER 09, 2019
This investigation was done in partnership with Katia Gagnon and Marie-Eve Fournier of La Presse.Data analysis by Andrew Bailey.With reporting contributions from Bryan Meler and Jaye Williams of the Ryerson School of Journalism
After you file a consumer proposal, the last thing on your mind might be a new mortgage, but you may be a lot closer than you think.
Maybe you wish to buy a home, or you own a home and are interested in refinancing your mortgage. Let’s first talk about purchasing a home.
When Can You Buy A Home After A Consumer Proposal?
Actually, this question comes up often. People want to know how soon can they buy. Sometimes they ask right after they file their consumer proposal, and other times it’s more than five years later, after they’ve paid it off in full.
First things first: pay off your consumer proposal completely before you take on major new mortgage debt.
If you have at least a 20% down payment, you may even be able to buy as soon as you complete your consumer proposal! As in, immediately.
You will almost always be working with either a B-lender or a private lender, but it is doable. But it’s more than just a matter of having finished your consumer proposal. Make sure you have been rebuilding your personal credit history—with new credit facilities and by cleaning up reporting errors. (There are ALWAYS reporting errors after you file a consumer proposal)
If you have less than 20% down payment, you will be looking for a high-ratio mortgage, which has default insurance, from one of CMHC, Genworth or Canada Guaranty.
In that case, you will need at least two years of clean, new credit since you completed your consumer proposal. But it’s best if you have at least two tradelines (credit card, loan, line of credit, etc.) with limits greater than $2,000.
Worst case scenario, three years after you completed your proposal, or six years after you filed your proposal (whichever comes first) it will fall off your credit report and whether or not you qualify for a mortgage to purchase a home will depend on the usual mortgage qualification criteria we all face.
When Can You Refinance Your Home After A Consumer Proposal?
This, too, can happen very quickly—in fact, we have helped numerous homeowners refinance their homes so they could complete their consumer proposal early. In some cases, it was as soon as the terms of their proposal were ratified in court.
This is what we call a lump-sum consumer proposal, and can be a very attractive way to settle your debts if you are a homeowner.
Should You Pay Off Your Consumer Proposal When You Refinance?
Actually, there are a few private lenders who will allow you to leave your proposal unpaid while you extract equity from your home. But unless there are specific, logical reasons to doing this, it’s not something I recommend.
I prefer refinancing to completely pay off the remaining balance owing on the consumer proposal. There may also be other things you need money for at the same time—like a home improvement project or a child’s higher education, or other family debts.
CRA debt crops up quite a lot too, particularly for those who are self-employed. You can take care of all these at the same time, provided you pay off the consumer proposal.
Why Would You Pay off Your Consumer Proposal Early?
1) Fear of the mortgage renewal. This concern is very real if your mortgage lender had a credit card or loan product included in your consumer proposal. They might have no interest in offering you a renewal when your current mortgage matures. So, you need to get in front of this issue as soon as you can, if your situation allows for it.
2) A strong desire to rebuild your personal credit history. Once you file your CP, your credit score is going to take a major beating. All debts included in the proposal will be reporting as R7s on your personal credit report.
Worse than that, some of them will be erroneously reporting as R9s—written off completely.
And some credit cards may say they were included in a bankruptcy, even though that is not true.
A few credit cards even report ongoing late payments after the proposal was filed. And sometimes even after the proposal is completed!
If you want to fix the damage to your personal credit report resulting from your consumer proposal, you are going to have to wait until it is paid in full and you have a completion certificate from your trustee. Here is additional information on rebuilding credit after a consumer proposal.
3) Wish to be normal. When you have bad credit, everything in life seems tougher and more expensive. Even if you wish to rent a home, not buy one, the landlord will usually ask for a copy of your credit report.
And if you want a new smartphone, or lease or finance a new car, bad credit will make all this that much harder.
If you allow your consumer proposal to run the full five years, that means it could be in your credit history six years altogether. It falls off three years after you complete, so keep that in mind. You can significantly shorten the waiting time by paying the consumer proposal off early.
4) Improve cash flow. In nearly all cases when we refinance a home where the owner is paying off a consumer proposal, they see an improvement in their monthly cash outflows. In a society where half of us are living paycheque to paycheque, this is attractive.
How Do You Refinance To Pay Off A Consumer Proposal?
First, your mortgage broker will do a thorough assessment of whether or not this is even doable. S/he will assess the marketability of your property, the amount of untapped equity, the reasons behind you filing your consumer proposal, as well as all the normal stuff lenders look at when reviewing a mortgage application.
An important consideration is your current first mortgage. Was it just renewed, or is it nearing maturity? Which lender is it with, and what might the prepayment penalty be if you were to break it and refinance to a new first mortgage with a B-lender?
Another consideration is whether or not your first mortgage is registered as a collateral charge, and if so, to what amount is it registered? We wrote about this a few months ago— it can make things difficult.
If refinancing the current mortgage makes sense, your broker will present your application and a presentation to the B-lenders most likely to entertain a file like yours. And s/he will bring back quotes for your consideration. If you choose to proceed, most of the time the entire process can be wrapped up in four to six weeks.
We actually see that happen less often than the other approach,which is to first apply for a private second mortgage.
In this scenario, the first mortgage is left intact and a new lender is found who will lend enough money to cover the proposal balance, any other debts and needs, and all the expenses associated with the mortgage.
During the term of the second mortgage (usually one year), we take the opportunity to cleanse all the reporting errors from the credit report, and also to strengthen the borrower’s credit profile with new healthy credit.
After a year, (longer if that makes sense) we then refinance the two mortgages into a single first mortgage.
It would be normal to expect this new replacement mortgage to be with a B-lender, since the consumer proposal is still fairly fresh. Here are some insights into how to do this.
Ultimately, the goal is to take the homeowners back to the world of A-lenders. That is usually possible after three years, but we have seen instances where it happened much sooner.
But it was never going to happen if the clients didn’t first make the decision to pay off the consumer proposal ahead of schedule.
If you are over-mortgaged and facing negative equity in your home, can you walk away from your mortgage in Canada? We explain what you can do when you can’t pay off the entirety of your mortgage loan after a sale or bank foreclosure.
How does a mortgage shortfall happen?
If you’re a homeowner and your mortgage is higher than the equity or the market value of your home, you are by definition, underwater. Meaning, if you sold your home today, you are not likely to get the full mortgage paid out by selling. Put another way, you have negative equity in your home.
Causes of a mortgage shortfall:
Price decline: you bought at the peak with a high-ratio mortgage, and the market dropped. For example, you bought a condo or a house for let’s say a million dollars with 10% down. The market subsequently flattens, and the list price is now $800,000, so you’re underwater by $100,000 plus selling costs, real estate commissions and potential mortgage penalties.
Debt consolidation: our typical homeowner client has more than $50,000 in unsecured debt. If you consolidate this through a second, or even third mortgage and the market softens, you can easily find yourself with less equity in your home that the total of all your mortgage debt.
Negative investment cash flow: you may have purchased an investment property and are funding the rental shortfall via a secured line of credit. If the market does not increase sufficiently to cover your accumulated cash loss, you may find yourself facing growing negative equity.
Canada has full recourse mortgage laws
A theoretical shortfall is not a real shortfall. You don’t have to sell. If you can keep your mortgage payments current, and expect that the market will return before you intend to sell you can hold tight.
If you are in default your lender will begin proceedings to collect. If you do not respond and cannot catch up on missed mortgage payments, your bank or lender will likely begin proceedings to sell your home through a power of sale.
If you sell with a shortfall, or your bank forecloses, you still owe your mortgage lender any deficiency between the money realized from the sale and the balance owing on your mortgage.
Should you sell your home for less than you borrowed and find yourself unable to repay the shortfall, in Ontario, your lender can pursue you to collect the difference, as they have full recourse:
Full recourse means that a lender can pursue you if your house is underwater and you sold your home, and there’s a shortfall … your mortgage lender can come after you legally for that debt in Canada.
How do I deal with an unsecured mortgage shortfall?
Like any debt, you are expected to make payments on it. If you are unable to pay back this shortfall, your creditors will pursue legal actions like a wage garnishment. In the case of CMHC, while it may take some time, they can also seize your tax refunds.
In Ontario, any mortgage shortfall after the sale of your home becomes an unsecured debt. Initially, your mortgage lender was a secured creditor. However, because the security, your home, has been sold, there is no longer any asset attached to the debt, and they are now an unsecured creditor.
If your mortgage was subject to insurance because you had a low down payment, your first step might be to draw on your CMHC Insurance. In this case, CMHC pays your original lender. However you still owe the debt, it’s just that now CMHC is now your creditor.
The good news is you have options to deal with mortgage shortfall debt:
File for bankruptcy to eliminate what you owe faster and get a fresh start.
The best place to start is to speak with a licensed debt professional about your relief options.
I think the big myth buster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff.
For a more detailed look at how to deal with mortgage shortfalls and how lenders can pursue you to recover a mortgage shortfall in Canada, tune in to today’s podcast or read the complete transcription below.
Not all consumer debt is bad but it’s wise to be cautious: expert
Increasing the amount of consumer debt isn’t necessarily bad as long as it’s affordable, according to Matt Fabian, director, research and industry analysis, at credit research company TransUnion.
TransUnion studies Canadian debt and produces a report every quarter. Their latest report is for the second quarter, ending June 30. In an interview, Fabian said the study is providing an overview of debt in relation to how fast income rates are rising and household net worth is increasing.
“Our study this quarter suggests that Canadians are still increasing their debt, up 3.9 per cent in the second quarter, compared to the same quarter a year ago,” he said.
“A couple of things that we note are, although debt continued to go up, the rate with which it increased has started to slow for the past couple of quarters, when you compare it annually,” said Fabian.
“It might be too early to say we’re at … an inflection point but the combination of interest rates increasing and some economic uncertainty in different regions of Canada are giving people pause and maybe they may not be accumulating as much debt as they were, at the rate they were,” he said.
There is some good news coming from the Atlantic region, Fabian said of the quarterly study.
Although the economy can be volatile in the Atlantic region, he said, TransUnion sees provinces like Nova Scotia performing much better than the national average.
The average non-mortgage consumer debt in Nova Scotia is about $28,400 and only went up about 1.24 per cent on a year-over-year basis, said Fabian. New Brunswick is similar, even slightly less, at $27,300 and it went up about 2.37 per cent. Prince Edward Island had average non-mortgage consumer debt of $28,426, which is up 2.16 per cent in the second quarter, compared to the same quarter in 2017.
Newfoundland and Labrador came in under the national average in the second quarter as well, he said, with average non-mortgage consumer debt landing at $30,169, up 2.16 per cent when compared to the second quarter of 2017.
Generally, the Atlantic provinces are well below the national average non-mortgage debt, which increased by 3.87 per cent in the second quarter, said Fabian. From a delinquency perspective, however, the region scored “a little bit higher” than the second quarter national average of 5.33 per cent.
New Brunswick’s consumer delinquency rates on non-mortgage debt in the second quarter – 90 days past due – was 8.37 per cent, the highest in the region.
According to TransUnion, Newfoundland and Labrador’s consumer delinquency rate was 6.88 per cent, Nova Scotia’s delinquencies were 6.87 per cent and P.E.I. had a consumer delinquency rate in the second quarter of 5.74 per cent.
“Newfoundland (delinquency rate) trended up .32 per cent while Nova Scotia went down about 0.7 per cent,” Fabian said. “Halifax among the major cities has amongst the lowest consumer debt, about $26,000, and it was the only major city in Canada that had negative consumer debt growth (in the second quarter).”
When one takes into context growing household net worth consumer debt is not necessarily a bad thing, Fabian said. “I think the fact that delinquency rates are a little bit higher might be a little bit concerning from a risk perspective but they’re not way out of whack and delinquency rates tend to have a long tail. So, some of the Atlantic provinces for sure are coming out of a little bit of a slump economically and it takes, sometimes, 12 to 24 months to manifest itself in delinquency rates.”
Fabian said as the economy bounces back it leads to jobs and increased salaries, so it seems reasonable to be optimistic about the debt situation.
“We tell people, generally, there’s two things to keep in mind. Understand how much you can afford. So, from a delinquency perspective there’s the notion of stress testing and you should kind of stress test yourself.
“When you’re looking to take out debt or increasing your credit card payments, by putting something on your credit card or taking out a line of credit for a renovation, or whatever it might be, don’t just consider the position you’re in right now and say, ‘Yeah, I can afford that $300 monthly payment.’ But kind of consider your cash flow and maybe, take into account your circumstance to say: ‘Could I cover that payment in the event that I lose my job.’ Or, ‘Can I cover that payment for three months while I’m looking for another job.’ This is what we call … stress testing yourself to see if you can absorb that shock should there be some unforeseen event.”
By taking a realistic view of debt and one’s ability to manage it, Fabian says it will provide a little bit of comfort for an individual to realize they really are comfortable taking on some additional debt, he said.
“From a balance perspective, as long as you feel like you can take that on, I don’t know if taking on credit debt is necessarily a bad thing, it depends on what you’re doing it for. If it’s a mortgage or a line of credit to renovate your home or something like to improve the value of an asset or property for investing then that might be a good use of your debt. If it’s to buy new shoes or go on a vacation because you just want to, might not be the best use of your debt,” Fabian concluded.
Source: Cape Breton Post – Roger Taylor Published: Sep 24, 2018 at 3:34 p.m.
Billionaire investor and Shark Tank star Mark Cuban said that the safest investment you can make right now is to pay off your debt, according to an interview with Kitco News earlier this year.
“The reason for that is whatever interest you have — it might be a student loan with a 7 percent interest rate — if you pay off that loan, you’re making 7 percent,” said Cuban. “And so that’s your immediate return, which is a lot safer than trying to pick a stock, or trying to pick real estate or whatever it may be.”
Cuban is mostly right: More often than not, paying down debt as fast as possible is going to provide the most value in the long run. And perhaps more importantly, it will do so without any real risk that comes with most investing. That said, each person’s financial situation is different, so it is worth a closer look at when it’s better to pay off debt or invest.
Debt is like investing but in reverse.
One important thing to note is that the same principals that make investing so important also make paying off your debt similarly crucial. As Cuban points out, the interest rate on your loan is essentially like the rate of return on your investments but backward. In fact, many investments are simply ways you’re letting your money get loaned out to others in exchange for them paying interest.
Although debt chips away at your net worth through interest, it’s important to note that different types of borrowing do so in very different ways. Every loan is different, with some offering terms that are actually quite favorable and others that can be excessively costly.
An overdue payday loan can lay waste to your financial health in no time, but a 30-year fixed-rate mortgage with a competitive rate can be relatively easy to manage with good planning. Borrowers should be sure they understand what kind of debt they have and how it’s affecting their finances.
Focus on the interest rate.
The key factor to take note of when considering how to allocate funds is the interest rate — usually expressed as your APR. Debt with a high APR is almost always going to be better to pay down before you focus on any other financial priorities beyond the most basic necessities.
The average APR on credit cards as of August 2018 was 14.38 percent. That’s well in excess of what anyone can reasonably expect to sustain as a return on most investments, so it shouldn’t be hard to see that investing instead of paying down your credit card is almost always going to cost you money in the long run.
Does your interest compound?
Another crucial factor in understanding how your debts and your investments differ is whether or not your interest is compounding. Compounding interest — like that on most credit cards — means that the money you pay in interest is added to the amount due and you’ll then have to pay interest on it in the future. That can lead to debt snowballing and growing exponentially. So, not only do credit cards have high interest rates, but they also make for debt that’s growing faster and faster unless you take action to pay it down.
However, that same principle can work in reverse. Gains on something like stocks will also compound over time, so there’s a similar dynamic at work when comparing your investment returns to fixed interest costs.
Know your risk tolerance.
Another factor that plays a big part in the conversation is your level of risk tolerance. Note that the question Cuban was responding to earlier was about what the “safest” investment was. For most people, erring well on the side of caution when it comes to something like personal finance just makes sense, and in that case, focusing on paying off debt is pretty crucial.
However, others might decide that the long-term payoffs that are possible make it worth rolling the dice on their future. Borrowing money for investments is common despite the risks associated, with everyone from massive investment banks to investors with margin accounts opting to take a calculated risk that their returns will ultimately outpace the cost of borrowing.
Costs of debt are set, investment returns often are not.
One important aspect of understanding the risks involved is that the cost of your debt is usually set and predictable, but the returns on your investments are not. It might be easy to look at the historical returns of the S&P 500 at just under 10 percent a year and assume that it’s worth it to put off paying down debt for an S&P 500 ETF or index fund as long as your APR is under 10 percent.
However, that long-term average does not reflect just how chaotic the markets really are. Sure, it might average out to about 10 percent, but some years will be in the negative — sometimes over 30 percent into the red. Even with bonds — where your rate of return is fixed — there is always a chance that the borrower will default and leave you with nothing.
If you have a variable rate loan
Of course, if your loan has variable interest rates, the equation changes yet again. You could see your interest rate rise or fall depending on what the Federal Reserve does, adding another layer of uncertainty to the decision — especially when it’s impossible to say with certainty which direction interest rates are headed in for the long run.
So, although debt will typically have more certainty associated with its costs than investing, that’s not always the case and variable rate loans could change things for some borrowers.
Don’t forget taxes.
You should also remember that the tax code includes a number of provisions that promote investment, and those can boost the value of investing. In particular, contributions to a 401(k) or traditional IRA are made with before-tax income, meaning that you can invest much more of that money than you would have with your after-tax income that would be used to pay down debt.
That’s especially true when you have an employer who matches your 401(k) contributions. If your employer matches, you’re essentially getting a chance to not just avoid paying taxes on that income, but you’re doubling its value the moment you invest — before it’s even started to accrue returns.
Some opportunities are unique.
Another important factor to consider is what type of investments you can make. In some very specific cases, you might have access to an investment opportunity that brings with it huge potential returns that could tip the scale. Maybe a specific local real estate investment you’re particularly familiar with or a startup company run by a family member where you can get in on the ground floor.
Opportunities like this usually come with enormous risks, but they can also create transformational shifts in wealth when they pay off. Obviously, you have to gauge each opportunity very carefully and make some hard choices, but if you do feel like it’s a truly unique chance to get the sort of returns that just don’t exist with publicly-traded stocks or bonds, it might be worth putting off paying down debt — especially if those debts have fixed rates and a reasonable APR.
What really matters with debt and investments
At the end of the day, you certainly shouldn’t opt to invest money that could be used to pay down debt unless the expectation for your returns is greater than the interest rate on your debt. If your personal loan has an APR of 15 percent, investing in stocks is probably not going to return enough to make it worthwhile. If that rate is 5 percent, though, you could very well do better with certain investments, especially if that’s a fixed rate that doesn’t compound.
But, even in circumstances where you might have reasonable expectations for returns higher than your APR, you might still want to take the definite benefits of paying down debt instead of the uncertain benefits associated with investments. When a wrong move might mean having to delay retirement or delay buying a home, opting for the sure thing is hard to argue with.
Which decision is right for you?
Unfortunately, there’s no magic bullet for knowing whether your specific circumstances call for you to prioritize paying down debt over everything else. Although paying down debt is typically going to be the smartest use for your money, that doesn’t mean you should do so blindly.
Putting off paying down your credit card balance to try your hand at picking some winning stocks is a (really) bad idea, but failing to make regular 401(k) contributions in an effort to pay off your fixed-rate mortgage a couple of years early is probably going to cost you in the long run — especially if you’re missing out on matching funds from your employer by doing so.
So, in a certain sense, Mark Cuban is right: Paying down debt is very rarely going to be a bad idea, and it’s almost always the safest choice. But that said, it’s still worth taking the time to examine the circumstances of your specific situation to be sure you’re not the exception that proves the rule.
Houses have become another debt-laden income-stream for Canadians
In 1998, Ann bought a one-bedroom condo in the Kitsilano area of Vancouver. Gainfully employed at a printing company, she found the monthly mortgage payments were within her budget (Ann and others quoted in this story asked that Maclean’s not use their full names). The building was on the older side, and eventually she got the itch to update the decor. She intended to replace only her bathroom sink; she ended up renovating the entire bathroom. “I remember thinking, ‘Well, now that I’ve started…’ ” The kitchen came next, then the living room and finally the bedroom. Ann thought the renos, funded partly on credit and spaced out over a few months, would boost her condo’s value. She also wanted to keep up with her neighbours. “Everyone was doing something,” she says.
Finances became tight afterwards, and she only paid the minimum on her credit card each month. Every year, her condo fees rose while her salary at the printing company (where she still works) stagnated. She began relying on credit for everyday expenses, and later took out a second card.
Soon, one of her banks began calling with a solution to help manage her debt. She ignored the inquiries, preferring not to think about her finances, but she started to feel desperate: “I just wanted to do something, and that was the only thing coming my way.” The bank offered a loan at a low rate to pay off her high-interest credit card debt, and she ended up taking out a second mortgage for $80,000. The interest rate still wasn’t manageable. “It was a huge mistake,” she says.
Saddled with two mortgages, rising condo fees and a flat income, she continued relying on credit cards. Surprise expenses, such as dental work, added to her debt. Embarrassment kept her from seeking help. Three years ago, she decided to sell her condo. Despite Vancouver’s booming market, the sale didn’t solve Ann’s financial problems. She moved in with a friend and was able to pay off her mortgages, but she couldn’t make much of a dent in her credit card debt.
This year, Ann turned 64. She was carrying $70,000 in debt, and knew she couldn’t work another decade to pay it down. That realization prompted her to seek help, and she eventually met with an insolvency trustee. Earlier this year, Ann’s trustee filed a consumer proposal on her behalf. Less severe than personal bankruptcy, a proposal is an offer to all of an individual’s creditors to pay a portion of debt under a strict plan over a maximum of five years. The remainder is discharged. Creditors typically agree to these arrangements since they are guaranteed to recoup at least some of their money. For Ann, filing a proposal came as a relief. “I actually feel like I can breathe again,” she says.
Other Canadians are still suffocating. Earlier this year, the household debt-to-income ratio hit another record of 167.8 per cent. A long period of abnormally low interest rates has enabled Canadians to carry massive debts, since monthly payments appear manageable. Further, in cities with rising home values, particularly Toronto and Vancouver, homeowners can secure a home equity line of credit (HELOC) to pay other debts or simply fund their lifestyles. Last spring, the Financial Consumer Agency of Canada warned that the increased use of HELOCs “may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford.”
Insolvencies, though, are rare. As of the end of July, there were nearly 123,000 consumer proposals and personal bankruptcies filed by Canadians this year, a decline of 1.2 per cent from the same period last year. That might be a sign of fiscal prudence, but it’s also the result of record low interest rates that ease debt-carrying costs. Scott Terrio, an insolvency estate administrator and president of Debt Savvy in Toronto, calls this phenomenon “extend and pretend.” Canadians can extend their debt repayment terms and pretend to live a lifestyle they can’t otherwise obtain. He sees it all the time—couples with decent jobs carrying large mortgages, and putting daycare, cars and vacations on credit.
Some reach a trigger moment when they can no longer pretend—a job loss, say, or divorce or illness. But lately Terrio has noticed a change in his business. More clients are coming in because they’re simply tapped out. As with Ann in Vancouver, there is no trigger. “It’s a gradual realization for some people,” Terrio says. “They can’t do it anymore.” Lana Gilbertson, an insolvency trustee in Vancouver, has seen the same change. “Nowadays, they have jobs, they’re making money, they’re plugging along, but they’re just in over their heads,” she says.
The cost of borrowing is set to rise, adding strain to households. The Bank of Canada hiked rates twice this year, signalling more could be coming—depending, in part, on whether households can handle it. Economists at TD Bank Group believe two more rate hikes are likely next year. That will cause rates on everything from lines of credit to car loans to mortgages to tick up. At the same time, house prices are not rising as quickly as they once were in many Canadian cities. RBC Economics forecasts home prices in Canada will increase 11.1 per cent this year—and just 2.2 per cent in 2018. Canadians won’t be able to pull cash out of their homes so easily to get themselves out of trouble. “The insolvency business is cyclical, and we’re at least a year overdue for shedding blood in the system,” Terrio says. “If ever we were poised to hit that right on the head, it’s now.”
For some Canadians who struggle with debt, the problem can be traced back to real estate. In a survey TD released in September, 56 per cent of respondents from across Canada were willing to exceed their budget by up to $50,000 to purchase a home. At the same time, 97 per cent of homeowners said they wished they’d factored in other obligations before buying, such as property taxes, maintenance costs and “overall lifestyle expenses.”
The problem is not confined to Toronto or Vancouver, where huge price gains have enticed buyers to stretch themselves for fear of getting permanently priced out. In Regina, Joshua and his wife purchased a house in 2014 when expecting their first child. Both 24 years old at the time, they carried about $35,000 in debt between them, mostly tied to student loans. “We rushed into getting a house because we just thought it would be the right thing to do,” Joshua says. “It almost felt wrong to be renting and having a kid.” (Joshua’s mom pressured them to buy, too.) In one weekend, they viewed 16 houses. The very last one felt right. They put down five per cent and moved in.
But the couple was blindsided by maintenance costs. Their furnace needed repairs, and they later had to replace the water heater, which set them back hundreds of dollars. After expenses, the pair has virtually no cash to put toward their debt. Joshua’s card is maxed out, and his wife’s card is close to the limit. Joshua says they’re frugal (splurging means going to Subway) and live paycheque to paycheque. The situation became worse this year. His wife is on maternity leave with their second child and their variable mortgage rate ticked up. “Just the way the rate is fluctuating is killing us,” Joshua says, who works in sales at a telecommunications firm. “It can’t keep changing like this.”
Staring down tens of thousands of dollars in debt, rising mortgage costs and no foreseeable way to substantially boost their incomes, the couple decided to sell their house and rent. They’re not expecting a windfall. A while back, their basement flooded and they used the insurance money to repair the foundation. The basement had been finished, but there’s no cash to renovate it, so it will be sold in “as is” condition. The market in Regina is also soft, and the average home price is down slightly from 2014. Joshua hopes to at least get his down payment back, and their financial situation should improve when his wife returns to work as a massage therapist. “We’ll be able to really hack away at our debt,” he says, “but it’s going to take years.”
While real estate has led to financial distress for some Canadians, it’s been a saviour for others. The home equity line of credit has allowed millions of households to borrow against their properties, providing cash for everything from renovations to investing to debt consolidation. HELOCs have been around in Canada since the 1970s, but in the mid-1990s, lenders started marketing them to a wider swath of consumers. Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20 per cent.
The pace of growth has slowed since then, but balances still hit $211 billion last year. Lenders have been all too eager to dole out HELOCs, creating the perception of instant, easy money. An animated commercial for Alpine Credits, a lender in B.C., features a room full of employees rubber-stamping loans—even for a client who wants to install a four-storey waterslide. (The employees celebrate by cheering while one pops open champagne and another tears off his shirt.)
One common use of HELOCs is to pay off higher-interest debt. Last year, according to Scotiabank, Canadians used $11.6 billion (or 28 per cent of HELOC withdrawals) for debt consolidation. Doug Hoyes, a founder of licensed insolvency trustee Hoyes, Michalos & Associates, has witnessed the shift. The firm has offices across Ontario and in 2011, roughly one-third of the firm’s clients owned a home when they filed for bankruptcy or a consumer proposal. Last August, just six per cent of insolvent consumers were homeowners. “You don’t need to file a proposal to pay off your debt,” he says. “You just go out and get a second mortgage.”
If the pace of home price appreciation slows down—or worse, prices drop—there will be consequences for households that have been piling on debt. The slowdown in the southwestern Ontario real estate market is already creating stress. Hoyes recently saw a couple who purchased a home four years ago and accumulated $70,000 in unsecured debt. They bought furniture, hired landscapers and borrowed to finance a swimming pool. Before the slowdown, the couple might have earned $100,000 by selling their home. Now they might get $70,000, which would barely cover their debts. They’re also reluctant to sell and move to a different neighbourhood. And because of the softening in the market, they haven’t been able to find a lender willing to issue them a HELOC large enough to cover their unsecured debt. Their solution? Convince one set of parents to take out a second mortgage, and borrow from them. “It’s the bank of mom and dad,” Hoyes says.
And while debt consolidation is an effective strategy if consumers don’t fall back on bad habits, Terrio says recidivism is a problem. “They go ka-ching out of their house and pay off their credit card debts, but they go and run up their cards again,” he says.
Borrowing against her home wasn’t enough for Charis Sweet-Speiss to pull herself out of debt. A registered nurse, she divorced and moved from Ottawa to Oliver, B.C., a town south of Kelowna, in 1998. Her then-boyfriend (now husband) wasn’t working at the time, and the couple used the divorce settlement to start building a new life; they bought a used car, a place to live and furniture. “Then that money was gone, so I just started using credit cards,” she says. “And it was so easy.” Their debt started building, and their income wasn’t sufficient to pay more than the minimum. New credit cards she’d never asked for arrived in the mail, and Sweet-Speiss started using them. She had 13 on the go at once, and eventually they were all maxed out. “I’ve always been employed. I make a good salary. But just paying the minimum every month was a lot of money,” she says. Every six months, she phoned each credit card company to wheedle them into reducing her interest rate. She caught some breaks, but never enough to make a big difference: “It was a horrible way to live.”
Sweet-Speiss says she wasn’t frivolous with her spending, but in retrospect, she made questionable decisions. When her daughter would run up a large balance on her own credit card, Sweet-Speiss sent her money—even though it meant sinking deeper into debt herself. Sweet-Speiss borrowed against her home at one point and withdrew money on two separate occasions to consolidate her debt, but was still left with $40,000 on her cards, and it built up again.
After more than a decade of amassing debt, Sweet-Speiss turned to the Credit Counselling Society for help ridding herself of nearly $67,000 spread across 13 cards. Once enrolled, her interest payments stopped and she was put on a plan to pay down principal. She completed the program this year. She still has a mortgage and a line of credit, but is finally free of high-interest credit card debt.
Sweet-Speiss says her mortgage would have been paid off a decade ago had she never borrowed against her house. Indeed, one of the problems with home-equity loans is that they cause debt persistence. HELOCs are marketed with little or no obligation to repay in a timely manner. For years, one of the main advantages of owning a home is the forced saving effect—paying the mortgage, combined with rising property values, builds equity. A HELOC undermines that dynamic, tempting consumers to access cash now rather than build wealth over the long term.
It marks a fundamental shift in the way Canadians think about homeownership. “Whatever happened to getting to the end of a mortgage and owning your home?” says Gilbertson, the trustee in Vancouver. “It’s less about truly owning our homes today and more about having another revenue stream to fund our lifestyles.”
That Canadians are carrying record amounts of debt is not in dispute. But the magnitude of the problem is contested. “I think the fears are overstated,” says Paul Taylor, CEO of Mortgage Professionals Canada. “Canadians are incredibly prudent, and history will show that.” As the head of an industry association for mortgage lenders, brokers and insurers, Taylor isn’t exactly impartial on the issue. But he points to a report from the Parliamentary Budget Officer released earlier this year showing that, since 2009, the debt service ratio—a measure of income spent to pay debt—has remained steady at around 14 per cent, not much higher than the long-term average. That’s a sign that even though we have more debt than 20 years ago, we’re not overextending ourselves, Taylor says.
But the same PBO report projects the debt service ratio will rise to an all-time high of 16.3 per cent by the end of 2021. Taylor says the premise is a “little bit flawed” because it presumes Canadians will make no changes to their finances owing to higher interest rates. “I’m certain people will become prudent again to ensure they retain that [historical] expense ratio,” he says. Already, brokers have been fielding calls from Canadians about locking in their mortgages to guard against future increases, for example.
Bank of Montreal chief economist Douglas Porter also contends that too much emphasis is placed on the debt-to-income ratio. “We have long been of the view that much of the commentary on this topic has been overwrought,” he wrote in a research note this month. The savings rate is close to the 25-year average of five per cent, which doesn’t point to a consumer debt apocalypse. Rather, Porter expects spending to “gradually moderate” as borrowing costs rise.
Still, numerous surveys show Canadians are worryingly close to the edge. A report from MNP Ltd., an insolvency trustee, released in October found 42 per cent of Canadians said they don’t think they can cover basic expenses over the next year without going deeper into debt. An earlier survey this summer found 77 per cent of respondents would have trouble absorbing an additional $130 per month in interest payments. And as organizations such as the IMF and the OECD have constantly warned, high household debt renders the country far more vulnerable to economic shocks.
When a downturn does hit, even a high income won’t necessarily provide enough protection. Gene moved from the U.S. to Calgary 12 years ago to take a job with a major oil company, earning more than $300,000 annually. He purchased a home for close to $1 million and supported his wife, two kids and mother-in-law. In 2015, Gene lost his job when the price of oil crashed, and was out of work for nine months. He took out a home equity loan for $30,000 to make ends meet, and eventually found another job at a pipeline company, but for half his previous salary. A six-ﬁgure income would be more than enough for most Canadians, but Gene and his family were accustomed to their lifestyle. The kids were enrolled in extracurricular activities, and housing costs added up to $4,100 every month.
A year later, Gene was laid off again. “It was just devastating for us,” he says, adding that he began questioning his self-worth if he was unable to provide for his family. He eventually found another job, but at a still smaller salary. On top of the mortgage and the line of credit, Gene had another $20,000 loan. When he first purchased his house, he didn’t quite hit the 20 per cent down payment threshold; his bank offered him a loan to cover the difference. He had a couple thousand in credit card debt and a small, high-interest loan from EasyFinancial he’d taken to cover an unexpected medical expense for a family member. Finally, he faced a $90,000 tax bill, since he opted not to pay after he lost his job. Gene sought help from an insolvency trustee earlier this year. “I just wasn’t making enough money, and I had to protect the family,” he says. Gene submitted a consumer proposal, but one of his creditors rejected the terms. In October, Gene filed for bankruptcy—just over two years after making a salary most Canadians can only dream of.
This sort of precariousness worries some experts, who fear wider implications for the Canadian economy. “We continue to see the household sector as accident-prone, with a complacency toward debt which could prove disruptive to the economy,” wrote HSBC Canada’s chief economist recently. The result is Canada is at “some risk” of a balance sheet recession—a period of slow growth or decline caused by consumers saving and paying down debt rather than spending. David Madani, an economist with Capital Economics in Toronto, doubts the growth Canada has seen in exports recently will be enough to offset the decline in consumer spending. “Canadian policy-makers have allowed household debt to rise above the disturbingly high levels reached in the U.S. in 2007, raising the risk of a similar potentially disastrous deleveraging down the road,” Madani wrote.
Statements like that could be dismissed as fear-mongering, but the reality is Canada hasn’t been in this situation before, and the outcome is impossible to predict. Canadians ignored warnings from policymakers about piling on debt for years because low interest rates were too enticing. Now households will have no choice but to dial it back. The only question is how bad the fallout will be.
Regulators have finally realized that Canada is addicted to debt, and are trying to limit the fallout. This is not a bad thing.
Canada’s real estate market has seen a lot of changes over the past year or so. Interest rates have gone up twice. Governments in B.C. and Ontario implemented foreign buyer taxes and other measures to cool housing markets, and the Greater Toronto Area is experiencing a dramatic slowdown in sales. More stringent mortgage stress-tests were introduced for borrowers last year, too, reducing demand. Now yet another change is on the horizon that the real estate industry warns will hit the housing market hard, with spill-over effects to the broader economy. Industry pushback and fear-mongering is predictable when regulations are proposed, but in this case, the housing industry isn’t exactly wrong. A proposed policy change from the country’s banking regulator threatens to reduce home sales, knock some first-buyers out of the market and push others to buy less expensive homes. That is the whole point, in fact—and it may be just what Canada needs.
In July, the Office of the Superintendent of Financial Institutions (OSFI) proposed stricter lending criteria for uninsured mortgages. In order to get a loan from a federally regulated financial institution, these borrowers would have to pass a more rigorous stress test and qualify at a mortgage rate two full percentage points higher than the posted rate (OSFI implemented a similar change for insured mortgages, where borrowers have a down payment below 20 per cent, last October). A comment period ended in August, and OSFI is expected to issue finalized guidelines this fall.
With a decision approaching, the housing industry has amped up warnings that the changes spell trouble for the housing market, first-time buyers and the economy at large. Tim Hudak, CEO of the Ontario Real Estate Association, said the plans amount to a “war on first-time homebuyers” and that the cumulative impact of tightening measures “risks capsizing the housing market altogether.” The Canadian Home Builders’ Association says housing starts could drop by up to 30,000 units annually, and wipe out anywhere from 42,500 to 91,500 jobs. Mortgage Professionals Canada (MPC), the industry group for lenders, brokers and insurers, warned national home sales could fall between 10 per cent and 15 per cent and reduce property values across the country, when combined with other recent changes and interest rate hikes. MPC supports a much milder stress test that it says will provide a buffer “without disqualifying too many middle class Canadians from their dream of attaining home ownership,” according to its submission to the regulator.
Far from mounting an attack on homebuyers, however, regulators are trying to prevent a disaster from befalling those same homebuyers and threatening the economy. I
n what will come as news to no one, Canadians are heavily indebted. The household debt-to-income ratio hit another record high of 167.8 per cent in the second quarter of the year. The debt service ratio, a measure of disposable income put toward loan payments, is set to increase to 16.3 per cent by 2021, according to the Parliamentary Budget Office, a level Canada has never seen. The number of households with a home equity line of credit and a mortgage against their properties has increased nearly 40 per cent since 2011. Non-mortgage debt is rising, too, including i nstallment loans—high-interest, short-term products. Our profligate spending habits are regularly bemoaned by the likes of the International Monetary Fund, the OECDand the Bank for International Settlements.
The primary driver of the debt surge has been falling interest rates. The benchmark rate set by the Bank of Canada has been dropping for decades, making it cheaper and cheaper for Canadians to borrow money—especially to buy houses. Canada’s housing boom tracks falling rates closely, particularly since the recession. The Teranet and National Bank House Price Index, for example, increased 72 per cent since January 2008. The gains are more pronounced in Toronto, which saw a 123 per cent surge over the same time period. Not long after the central bank’s two rate cuts in 2015, the housing market in Toronto fell into complete insanity.
Now with the recession behind us and the country recovering from the oil crash, the Bank of Canada believes we can withstand higher interest rates. Governor Stephen Poloz has signalled the central bank is on a tightening path, albeit a very cautious and gradual one.
Still, that marks a dramatic shift after years of excessively loose monetary policy. Previously, Canadians could renew their mortgages and obtain more favourable rates. Now the odds are they’ll have to pay more come renewal time. Those who opt for variable-rate mortgages can expect the same. Because this scenario is new to an entire generation of homebuyers, OSFI wants lenders to ensure borrowers have the means to service their mortgages at higher rates. To some degree, that protects the homeowner from the shock of steeper payments. It also discourages lenders from issuing mortgages that could turn sour and put the financial system at risk. When it comes to uninsured mortgages, after all, the lender bears the risk.
“When you’ve been in such a low interest rate cycle that’s out of sync with what we’ve seen historically, and we see housing markets really go to stratospheric levels, the logic of why these changes come in makes sense,” says Beata Caranci, chief economist at TD. She estimates the proposed OSFI measures will impact about 5 per cent to 10 per cent of sales. That’s not insignificant, but not cataclysmic either. “The vast majority of buyers would still qualify,” she says. OSFI isn’t likely to change direction after the Bank of Canada’s rate hike this month. Should stress-testing hit the market hard, contributing to a bigger-than-expected slowdown in consumer spending, the central bank would likely pause before hiking rates again, Caranci says.
Some of the industry’s concerns are valid, according to Adrienne Warren, a senior economist at Scotiabank. “There’s a bit of a risk of cooling off the market a little too abruptly,” she says. “But saying that, it’s still reasonable to build in some interest-rate buffer on new mortgages, just to limit financial vulnerabilities.” Warren adds there are benefits to eliminating the “distorting incentives” between insured and uninsured mortgages.
When OSFI implemented similar stress-testing measures on insured mortgages last year, some buyers may have attempted to skirt the rules. The Bank of Canada flagged such concerns in its financial system review in June. If buyers have a down payment 20 per cent or more, they’re not required to obtain mortgage insurance or undergo the stress-testing OSFI put in place last year. So
me buyers might be borrowing money from friends and family or taking out loans to reach the 20 per cent down payment threshold, thereby taking on more financial risk. The central bank also noted that borrowers are stretching amortization periods past 25 years. While that allows households to pay off debt more slowly, it also limits their ability to extend the amortization period further to deal with an income shock. OSFI’s proposals could help reduce these risks.
MPC has also argued that these stress-tests will push some buyers to use unregulated lenders that do not fall under OSFI’s purview. That, too, is a valid concern. But it’s not a reason for OSFI to backtrack. Rather, it’s a reason to apply more scrutiny to the unregulated space. Further, Hudak has pointed out that mortgage delinquencies in Canada have dropped and that most households make wise financial decisions, a statement that inadvertently makes a case for OSFI’s stress-testing proposals. Delinquencies are low because interest rates are low. Higher rates will result in more delinquencies if today’s borrowers don’t have the resources to deal with that reality.
Instead of a “war on homebuyers,” governments and regulators are finally waking up to the fact that Canada has become addicted to debt and real estate, and are trying to limit the potential fallout. There will be turmoil as interest rate hikes and regulations work through the market, but the alternative could be far worse.
Not everyone can qualify for a mortgage these days. Government regulations targeting down payments, investment properties and high-ratio buyers mean that more Canadians won’t qualify for a home loan.
It’s often said that housing is the bedrock of the Canadian economy. But for years, federal regulations have clamped down on the ability to qualify for a mortgage. The self-employed, individuals living in rural areas and those with past credit troubles have long struggled with home financing. Now that struggle is extending to other segments of the population.
Against this backdrop, more and more Canadians are turning to private mortgage lenders for their home financing needs. Although many borrowers think of private mortgages as a last-resort option, they are a viable option for many people.
Private Mortgage Lenders Operate Differently from Banks
A private mortgage is simply a home loan offered by an individual or company other than a bank or traditional finance provider.
One of the biggest benefits of working with a private lender is they operate differently from traditional banks on many levels. Since they get their money through individual investors or groups of investors, they have the freedom to set their own lending criteria. This means they are more flexible in the application process and don’t have to deal with the stringent guidelines set forth by the major institutions. This means that if your situation falls outside conventional lending guidelines, a private mortgage could be your best bet.
Private mortgages are often suitable if you:
Want to purchase raw land or unique property
Have less than ideal credit
Want to invest in real estate
Need access to equity in your home, but don’t want to refinance your first bank mortgage due to excessive penalties
Need to consolidate high interest rate debt
Are looking to renovate existing property
Looking for a short-term loan
How Private Mortgages Work
If you’re exploring a private mortgage, the first step is to seek out a broker who provides alternative lending services. The broker will assess your situation and determine if you are eligible for a loan. In particular, they will assess your ability to make the loan payments on time.
From there, the broker will then search for the best mortgage solution that meets your specific needs. They will then structure the deal and put in place an exit strategy so that you know how long the private mortgage will last.
It’s important to note that private lenders usually lend on location. That’s because private mortgages are uninsured, which means the lender falls back on the property should a default occur. That’s why location of the property is extremely vital in determining whether you qualify for a private mortgage and the rate that you’re offered.
Broker fees and legal fees generally apply when securing a private mortgage.
Private mortgages are growing in popularity as more borrowers fall outside the traditional lending guidelines set forth by the major banks. The good news is there are plenty of options for those looking for an alternative lending solution to finance their next property or major purchase.
Source: Canada Mortgages Inc. – 1 September, 2017 / by Sam Bourgi
There has been an awful lot of noise in the media recently about the increasingly high levels of debt the average Canadian is carrying around on his or her back. And rightfully so: According to a recent report from Statistics Canada, our total national debt load, including mortgages, sits at around $1.8 trillion. (Why does that number always make me think of Mike Myers?). That’s more than $50,000 for every Canuck. But amid all the commotion are some surprisingly difficult-to-answer questions: Is all this debt bad? Is any of it good? And how can we determine what debt is good, what debt is bad or should we just try to avoid all debt like the plague? The answers aren’t always clear-cut. Clearly, further insight is required.
Economic types traditionally describe debt as being either good or bad, depending on what it’s used for. The good stuff is generally defined as money borrowed to buy something that will appreciate in value, like a house. Conversely, bad debt is described as money borrowed to buy something that will depreciate in value, like Buddy using his credit card to borrow $2,000 for a new set of golf clubs (they’re on sale!), because everyone knows you’ll play like Tiger Woods once you have a $2,000 set of his Nike golf clubs.
Unfortunately it’s not that simple. Not all good debt is good and not all bad debt is bad. (Warning: This is going to get wordy.) Yes, I am saying that there is such a thing as bad good debt and good bad debt. An example of bad good debt is when Buddy goes out and buys an oversized house that exceeds his needs. And to make matters worse, Buddy buys the house before he is financially ready. He puts down a too small down payment on his too big house and as a result, he ends up with a too big mortgage—which he amortizes over too many years. Given enough time, the house will likely appreciate, and this technically makes Buddy’s big mortgage “good” debt. However, it’s unlikely the house’s value will increase enough to cover the cost of the interest he’ll end up paying, let alone the larger expenses the house is going to generate: heating, upkeep, taxes and so on. To boot, there is a real possibility that this “good” debt will interfere with Buddy’s ability to properly save for his future. Broadly speaking, if Buddy’s housing costs (mortgage, utilities, insurance and taxes) exceeds 32% of his gross income, and if he will be paying those costs for more than 25 years, then it’s bad good debt.
On the other side, when Buddy’s sister Buddy-Lou takes out a two-year loan to help her pay for a gently used Honda Civic, that loan is technically bad debt since the car is going to depreciate. However, borrowing this money makes more sense than borrowing for a new car and it certainly makes more sense than leasing a new vehicle. (We’ll save that discussion for another time.) Assuming she takes care of it, Buddy-Lou’s car will still have value for years after the loan is paid off. Sure, it would be nice if she had the money in her bank account to buy that Civic when her old car died, but it would also be nice if George R. R. Martin didn’t kill off all of the best characters in Game of Thrones. Life happens. The loan needs to be manageable, without putting pressure on Buddy-Lou’s ability to save for her future. If that’s the case, it’s good bad debt.
It’s important to understand there is a big difference between accepting that you likely will incur some debt as you go through life and accepting debt as a way of life. It’s also a good idea to occasionally remind ourselves that even good good debt, like a properly structured mortgage is debt nonetheless and, as such, the interest you are paying on it isn’t doing you any favours. All debt, good, bad or anything in between, costs money and we should always be on the lookout for ways to pay it off as quickly as reasonably possible.
As a nation, we have become far too comfortable with personal debt. Today’s low interest rates are certainly a contributing factor, but the “keeping up with the Joneses” syndrome plays a part too. In some circles, it has become acceptable, even fashionable, to rack up mountains of high-interest credit card debt and then borrow more money to make the payments. Do not buy into this thinking. Pun intended. Credit card interest rates are anything but low, with many cards charging up to 29.99% interest. Even a “low interest” credit card will charge you around 12%. If you’re carrying a balance on your cards and you’re struggling to pay it down, you should transfer the balance to a low interest line of credit while you work it off. That would at least be better bad debt.
There is an inherent danger in describing debt as good. Sure, some types of debt are obviously better than others but that’s not the same thing as being good. Maybe we should further refine the two traditional definitions of debt into “bad debt” and “responsible-debt-that-I-thought-about-carefully-before-I-took-on-but-I-still-need-to-eliminate-as-quickly-as-reasonably-possible debt.” Because really, the only good debt is no debt at all.
Source: Money Sense – Robert R. Brown is a personal finance speaker and the author of Wealthing Like Rabbits. Follow him on Twitter @wealthingrabbit