Category Archives: senior debt

Walking Away From A Mortgage in Canada

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:

  1. Make a settlement offer through a consumer proposal,
  2. 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.

Source:  Hoyes.com (Hoyes – Michalos) By 

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Don’t-pay-til-you-die reverse mortgages are booming in Canada as seniors binge on debt

Don’t-pay-til-you-die reverse mortgages are booming in Canada as seniors binge on debt

Already carrying debt, many seniors can’t downsize because they can’t afford high rents, so turn to reverse mortgages for a new source of income

If you’re 55 or older, you can borrow as much as 55 per cent of the value of your home. Principal and compound interest don’t have to be paid back until you sell the home or die.Getty Images/iStockphoto

Reverse mortgages are surging in Canada as more older people join the country’s debt bandwagon.

If you’re 55 or older, you can borrow as much as 55 per cent of the value of your home. Principal and compound interest don’t have to be paid back until you sell the home or die. To keep the loan in good standing, homeowners only need to pay property tax and insurance, and maintain the home in good repair.

“We’ve only been in this market for 18 months, but applications are jumping,” and have tripled over the past year, Andrew Moor, chief executive officer at Equitable Group Inc., said in an interview. The company, which operates Equitable Bank, sees the reverse mortgage sector expanding by about 25 per cent a year. “Canadians are getting older and there is an opportunity there.”

Outstanding balances on reverse mortgages have more than doubled in less than four years to $3.12 billion (US$2.37 billion), excluding foreign currency amounts, according to June data from the country’s banking regulator. Although they represent less than one percentage point of the $1.2 trillion of residential mortgages issued by chartered banks, they’re growing at a much faster pace. Reverse mortgages rose 22 per cent in June from the same month a year earlier, versus 4.8 per cent for the total market.

The fact that these niche products are growing so quickly offers a glimpse into how some seniors are becoming part of Canada’s new debt reality. After a decades-long housing boom, the nation has the highest household debt load in the Group of Seven, one reason Bank of Canada Governor Stephen Poloz may be reluctant to join the global monetary-policy easing trend.

More seniors are entering retirement with debt and the cost of rent has shot up in many cities, making downsizing difficult amid hot real estate markets. Reverse mortgages offer a new source of income.

Canada’s big five banks have so far shied away from the product. Only two lenders offer them in Canada. HomeEquity Bank, whose reverse mortgage has been on the market for 30 years, dominates the space with $3.11 billion on its books. Equitable Bank, a relatively new player, has $10.1 million. Shares in parent Equitable Group have surged 75 per cent to a record this year.

Critics say reverse mortgages are a high-cost solution that should only be used as a last resort.

“When they think of their cash flow, they’re not going to get kicked out of their house, but in reality, it really has the ability to erode the asset of the borrower,” Shawn Stillman, a broker at Mortgage Outlet, said by phone from Toronto.

HIGHER RATES

Interest rates are typically much higher than those for conventional mortgages. For example, HomeEquity Bank and Equitable Bank charge 5.74 per cent for a five-year fixed mortgage. Conventional five-year fixed mortgages are currently being offered online for as low as 2.4 per cent.

Atul Chandra, chief financial officer at HomeEquity Bank, said the higher rates are justified because the lender doesn’t receive any payments over the course of the loan.

“Our time horizon for getting the cash is much longer, and generally the longer you wait for your cash to come back to you, the more you need to charge,” Chandra said in a telephone interview.

MOST DELINQUENT

Executives at HomeEquity Bank and Equitable say they are focusing on educating people about reverse mortgages to avoid mistakes that were made in the U.S. during the housing crisis — including aggressive sales tactics.

While delinquency rates on regular mortgages are still low for seniors, they were the highest among all age groups in the first quarter, at 0.36 per cent, according to data from the federal housing agency. The 65-plus demographic took over as the most delinquent group at the end of 2015. For non-mortgage debt, delinquency rates in the 65-plus category have seen the biggest increases over the past several quarters, Equifax data show.

Reverse mortgages aren’t included in typical delinquency rate measures — borrowers can’t be late on payments because there are no payments — but they can be in default if they fail to pay taxes or insurance, or let the home fall into disrepair. However default rates for reverse mortgages have remained stable, even with the strong growth in volumes, said HomeEquity’s Chandra.

According to a scenario provided by HomeEquity Bank, a borrower who took out a reverse mortgage of $150,000 at an interest rate of 5.74 per cent would owe $199,058 five years later. A home worth $750,000 when the reverse mortgage was taken out would be worth $869,456 five years later, assuming 3 per cent annual home price appreciation, meaning total equity would have grown by about $70,000.

Source: Financial Post – Bloomberg News 

Chris Fournier and Paula Sambo 

September 16, 2019

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Acceptable debt versus bad debt

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 –  
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How reverse mortgages staged a comeback

Professor Chris Mayer has a lesson for ­homeowners: Reverse mortgages, which let older Americans tap their home equity without selling or moving, aren’t as risky as some say. In an online video, he brushes aside “common misconceptions,” including fears about losing your home.

Mayer, a real estate professor at Columbia Business School, isn’t an impartial observer. He’s chief executive officer of a company that sells reverse mortgages. He’s trying to rehabilitate one of the U.S.’s most-­reviled financial products—part of a broader push that relies in part on academics with interests in the mortgage industry.

The host of Mayer’s talk was the American College of Financial Services, a school that trains financial planners and insurance agents. Until recently, it had a task force funded by reverse mortgage companies, which each contribute $40,000 a year. They include Mayer’s firm, Longbridge Financial, and Quicken Loans’ One Reverse Mortgage.

To show the need for reverse mortgages, industry websites cite a Boston College retirement research center run by Alicia Munnell, a professor and former assistant secretary of the Treasury Department in the Clinton administration. She once invested $150,000 in Mayer’s company, though she’s since sold her stake.

The six-year-old task force cites key successes. Mainstream publications have run articles quoting positive research on the loans, and financial planners are growing more comfortable recommending them. The Financial Industry Regulatory Authority, the securities industry’s self-regulatory agency, in 2014 withdrew its warning that reverse mortgages should generally be used as “a last resort.”

Mayer and Munnell said they’ve fully disclosed, in research, appearances, and interviews, their financial interest in the lender. Columbia and Boston College both said they approved the arrangements.

The professors and industry officials say these government-backed mortgages deserve a second look, partly because of a series of federal reforms in recent years designed to protect taxpayers and consumers.

“We are looking to help people responsibly incorporate home equity in their retirement planning,” Mayer said of Longbridge.

Reverse mortgages let homeowners draw down their equity in monthly installments, lines of credit or lump sums. The balance grows over time and comes due on the borrower’s death, at which point their heirs may pay off the loan when they sell the house. Borrowers must keep paying taxes, insurance, maintenance and utilities—and could face foreclosure if they don’t.

While even critics say the mortgages can make sense for some customers, they say the loans are still too expensive and can tempt seniors to spend their home equity early, before they might need it for health expenses.

Fees on a $100,000 loan, based on a $200,000 home, can total $10,000. Because the fees are typically wrapped into the mortgage, they compound at interest rates that can rise over time. Homeowners who need cash could be better off selling and moving to less expensive quarters.

“The profits are significant, the oversight is minimal, and greed could work to the disadvantage of seniors who should be protected by government programs and not targeted as prey,” said Dave Stevens, CEO of the Mortgage Bankers Association until last year and a commissioner for the Federal Housing Administration in the Obama administration.

Academics represent a new face for an industry that’s long relied on aging celebrity pitchmen. The late Fred Thompson, a U.S. senator and Law & Order actor, represented American Advisors Group, the industry’s biggest player. These days, the same company leans on actor Tom Selleck.

“Just like you, I thought reverse mortgages had to have some catch,” Selleck says in an online video. “Then I did some homework and found out it’s not any of that. It’s not another way for a bank to get your house.”

Michael Douglas, in his Golden Globe-winning performance on the Netflix series The Kominsky Method, satirizes such pitches. His financially desperate character, an acting teacher, quits filming a reverse mortgage commercial because he can’t stomach the script.

In 2016 administrative proceedings, the U.S. Consumer Financial Protection Bureau accused American Advisors, as well as two other companies, of running deceptive ads. Without admitting or denying the allegations, American Advisors agreed to add more caveats to its advertising and pay a $400,000 fine.

Company spokesman Ryan Whittington said the company has since made “significant investments” in compliance. Reverse mortgages are “highly regulated, viable financial tools,” and all customers must undergo third-party counseling before buying one, he said.

The FHA has backed more than 1 million such reverse mortgages. Homeowners pay into an insurance fund an upfront fee equal to 2 percent of a home’s value, as well as an additional half a percentage point every year.

After the last housing crash, taxpayers had to make up a $1.7 billion shortfall because of reverse mortgage losses. Over the past five years, the government has been tightening rules, such as requiring homeowners to show they can afford tax and insurance payments.

In response to public concerns, Shelley Giordino, then an executive at reverse mortgage company Security 1 Lending, co-founded the Funding Longevity Task Force in 2012. It later became affiliated with the Bryn Mawr, Pennsylvania-based American College of Financial Services.

Giordino, who now works for Mutual of Omaha’s reverse mortgage division, described her role as “head cheerleader” for positive reverse mortgages research. Gregg Smith, CEO of One Reverse Mortgage, said the group is promoting “true academic research,” including work by professors with no industry ties.

In January, the American College cut its ties with the task force because the school, as a nonprofit institution, wasn’t comfortable being affiliated with an organization endorsing products, according to Vice President James N. Katsaounis. “A proper retirement portfolio is one that is well-balanced and diversified, which may or may not include reverse mortgages,” he said.

Mayer, the Columbia professor and reverse mortgage company CEO, said many older consumers could benefit from the loans because they can never owe more than their house is worth even if real estate prices plunge.

A former economist at the Federal Reserve of Boston with a Ph.D. from the Massachusetts Institute of Technology, Mayer joined the Columbia faculty in 2004 and currently co-­directs Columbia’s Paul Milstein Center for Real Estate. He wrote his first paper on reverse mortgages in 1994, when the FHA product was five years old.

In 2012, Mayer co-founded Longbridge, based in Mahwah, New Jersey, and in 2013 became CEO. He’s on the board of the National Reverse Mortgage Lenders Association. He said his company, which services 10,000 loans, hasn’t had a single completed foreclosure because of failure to pay property taxes or insurance.

While many colleges let professors engage in outside business activities, Gerald Epstein, a University of Massachusetts economics professor who’s studied academic conflicts of interest, said Columbia may need to scrutinize Mayer’s arrangement closely.

“They really should be careful when people have this kind of dual loyalty,” he said.

Columbia said it monitors Mayer’s employment as CEO of the mortgage company to ensure compliance with its policies. “Professor Mayer has demonstrated a commitment to openness and transparency by disclosing outside affiliations,” said Chris Cashman, a spokesman for the business school. Mayer has a “special appointment,” which reduces his salary and teaching load and also caps his hours at Longbridge, Cashman said.

Likewise, Boston College said it reviewed Professor Munnell’s investment in Mayer’s company, on whose board she served from 2012 through 2014. Munnell said another round of investors in 2016 bought out her $150,000 stake in Longbridge for an additional $4,000 in interest.

She said she now prefers another approach: States allowing seniors to defer property tax payments. The advantages include “no fee, no paperwork and no salespeople,” she said. In one way, she’s glad she exited her reverse mortgage investments.

“Anytime I had a conversation like this, I had to say at the beginning that I have $150,000 in Longbridge,” she said. “I had to do it all the time. I’m just as happy to be out, for my academic life.”

 

Source: Copyright Bloomberg News – Business News 13 Mar 2019

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Mark Cuban Says the Best Investment Is Paying Off Your Debt — Is He Right?

Mark Cuban Says the Best Investment Is Paying Off Your Debt -- Is He Right?

Image credit: Invision/AP/REX/Shutterstock via GOBankingRates

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.

As such, it’s important to keep in mind that as satisfying as it might be to watch your money grow in investments, it’s doing just the opposite when you have debt.

Every loan is different.

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.

Source: Entrepreneur – Joel Anderson , 

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How Canadian homes became debt traps

underwater mortgage

Source: MoneySense.ca – by   November 13th, 2017

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.

underwater mortgage

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The ballyhooed ‘war on homebuyers’ isn’t real

 

Source: Macleans.ca – September 22, 2017

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.

RELATED: Drowning in debt is the new normal in Canada

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.

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