Tag Archives: debt

4 Men with 4 Very Different Incomes Open Up About the Lives They Can Afford

Stuart Patience

 The median household income in America is $53,657. Politicians draw $250,000 as the line between the middle and upper classes. And the true starting point of real wealth remains a cool $1,000,000. We asked four more or less typical men, each of whom earns one of these incomes, to tell us about the lives they can afford.

$1,000,000 Per Year – Tim Nguyen, 35

Location: Huntington Beach, California

Occupation: Business owner, CEO/cofounder of BeSmartee, a DIY mortgage marketplace

Family status: Married with a 9-month-old son

Homeowner? Renter? “I’m a homeowner. No mortgage.” (Price of home: $1 million.)

Do you keep a budget? We track every single penny that comes in and out of our bank account. And we give 6 percent of our money away to charity. We have a big heart for animals, children, the el­derly, the underprivileged.

What’s a weekly grocery bill for you? I break it down monthly. We eat main­ly at home. We spend around $1,200 a month.

One thing your family needs but can’t afford: There’s nothing that we need that we can’t afford. Anything reasonable I can afford.

One thing you want but can’t afford: The thing that keeps me up at night is want­ing to retire my parents. There’s a certain dollar figure that would allow me to pay off all their debts. That’s my first goal: to retire my parents so they can be independent and just live their lives.

The last thing you bought that required serious plan­ning: We budget our money all the time, so we’ve already been planning for every­thing—I could tell you exactly where all my money is going over the next five years.

Do you have credit cards? I have one credit card. It’s cash for points, so we charge ev­erything on the card and pay it off at the end of the month.

How much debt are you carrying now? Less than 10 grand.

I’VE BEEN BROKE BEFORE. I’VE REFINANCED MY HOUSE TO PAY MY EMPLOYEES. I’VE BEEN THROUGH ALL THAT—THAT WAS ME WORRIED.

Saving for retirement? Yes. [I’ve put away] north of $5 million.

At what age would you like to retire? I’ll always be working. As far as working on a start-up, I want to be done with that in five or 10 years. But as far as working, investing in real estate, things of that nature, you can do that until you’re 90.

College plans for your kids? We set up a trust with our at­torney where our kids will have money for college. But they’ll only get more than that if they achieve their milestones, such as getting a certain GPA or vol­unteering in the community. We want our kids to be good citizens. They can’t be spoiled brats. We want them to understand what it means to work and to earn your way to the top. We put the rules in place to help reinforce that.

Looking at your current ca­reer prospects, how much money do you think you’ll be earning in ten years’ time? My goal is to have a net worth of $150 to $200 million.

How happy are you on any given day, on a scale of one to ten? I’d say eight or nine. Lately, with the start­-up, I’ve been putting in two to three hours more per day than I’d like, and that’s taking away from family time. So if I could get those two or three hours back, I’d be a happy man.

How often do you worry about money? Maybe once a week. I’ve been broke before. I’ve refinanced my house to pay my employees. I’ve been through all that—that was me worried. Now, because I’m able to forecast and plan my money better, there’s not as much worry.

How much money do you think you’d need to have the life you want? I need about 25 [million]. That includes retiring my parents, an upgraded home, and enough money to make sure my kids have funds available when they want to start their own businesses. There’s a certain amount of mon­ey you need to live the life you want. Beyond that, it’s really a game, and money is the scoreboard.

Do you think your taxes are too high? I’m happy with taxes. I had a really good year when I was 22 or 23—I made about 250 grand—and I came home and complained to my dad about it. I said, “I can’t believe I’m paying all those taxes! Half the money is gone!” And my dad said, “You should feel lucky that you live in a country where you can pay taxes”: He came from a communist-run coun­try. Ever since that day, I never complain about my taxes.


$250,000 Per Year – Yakov Villasmil, 41

Location: Miami

Occupation: Real Estate Agent

Family Status: In a relationship; one son, 10 years old

Monthly rent: $2,000

Do you keep a budget?  Yes, I’m very organized with it. Overall, my fixed expenses are about $7,000 a month. They include rent and about $1,000 a month for transportation, $180 a month to the cleaning lady, $200 for gas for the vehicle, and a handful of little things—$300 a month for Netflix, Pandora, Skype, subscriptions like that.

What’s a weekly grocery bill for you?  I would say about $200 a week.

AT THIS POINT IN MY LIFE, IF I HAD $600,000 YEARLY INCOME, I WOULD HAVE THE LIFE THAT I WANT TO BE LIVING. BUT THEN AGAIN, WHEN I GET THERE, I’LL WANT TO BUY THE JET.

One thing your family needs but can’t afford: Nothing.

One thing you want but can’t afford: I’m a fan of watches, and there’s a Cartier that just came out that’s about $10,000. It’s not that I can’t afford it; it’s just not a priority right now.

The last thing you bought that required serious plan­ning: I spend money trav­eling every year, and that’s something I put some thought into. Last December, I went to Austria, Slovenia, and Italy.

Do you have credit cards? Fifteen.

How much debt are you carrying now? $7,700 on one card, and it should be paid off by the end of the month.

Saving for retirement? I am saving, but not for re­tirement. I’m saving up to buy an apartment building, which will give me another stream of income. My money is all in play right now to make more money. The kind of life that I want to live when I retire is not one I have to manage by having, you know, a million dollars and 3 or 4 percent [interest]. It’s not going to happen.

At what age would you like to retire? I don’t think that I want to retire.

But say you did: At what age would you be able to retire? I want to be financially free by age 50.

College plans for your kid? No, but it’s all part of making sound investments.

Looking at your current career prospects, how much money do you think you’ll be earning per year in 10 years’ time? In 10 years’ time, I want to have $50,000 a month from apartment buildings, and another $50,000 a month from the real estate business. A million-five per year is the goal.

How often do you worry about money? Every single day. Every single minute. I always want more, and every single day I’m thinking, “What’s the next move?”

How much money do you think you’d need to have the life you want? At this point in my life, if I had $600,000 yearly income, I would have the life that I want to be living. But then again, when I get there, I’ll want to buy the jet.

How happy are you, on a scale of one to 10? I’m a good nine every day.

Do you think your taxes are too high? You know what? No, I don’t think they’re too high. I re­member I had a boss about 10 years ago who said, “You guys complain about the tax­es being taken out—if you don’t want them to take that much, just make less.”


$53,000 Per Year – Michael Greene, 48

Location: Brooklyn

Occupation: Concierge for a property-management group

Family status: Married with 3 children (a 21-year-old stepson and 8-year-old twin girls)

Monthly rent: $1,000

Do you keep a budget?

We do. Because of the size of our family, we have to budget at least $150 per month for BJ’s [Wholesale Club]. BJ’s is our friend; we have to buy in bulk.

What’s a weekly grocery bill for you? Probably in the range of $100 to $125.

I’D LOVE TO STAY IN BROOKLYN, BUT RIGHT NOW THE ASKING PRICE IS BETWEEN $500,000 AND $600,000.

One thing your family needs but can’t afford: A ranch-style home, four to five bedrooms, two to three bathrooms. I’d love to stay in Brooklyn, but right now the asking price is between $500,000 and $600,000.

One thing you want but can’t afford: I’ve always liked Volvos. If I could get a big, six-seater Volvo, that would be nice. In my color: navy blue. With a little TV in the back for the kids.

The last thing you bought that required serious planning? We bought bedroom sets for ourselves and our girls four years ago. Our set was between $5,000 and $6,000, with the dressers and everything. Our girls’ little beds—which they’re about to outgrow now—we got a better deal for them: around $2,000 or $2,500. I had to go into my savings a bit to get it, but we got it. We got it done.

Do you have credit cards? Just one. A Chase Visa. I’m definitely on top of my month­ly payments, and I try not to go anywhere past $300 to $400 a month. That would be stretching it. And I have to thank my wife for that. She helps me stay focused.

How much debt are you carrying now? No credit-card debt, but I definitely still have a student loan from the mid-nineties that I’m trying to bang out. I think I still have seven G’s left.

Saving for retirement? Yes, I am. Our company of­fers a 401(k) plan, and our union offers one, so I have two separate running re­tirement plans. Gotta do it. I don’t know how much is in there at the moment.

At what age would you like to retire? I’m 48 now. Realistically, I’d say I wouldn’t want to go past 60. But I think I’m looking at 60 be­fore I’ll be able to retire.

College plans for your kids? We have a college plan in place for the girls. I put away money biweekly—$75 to $100.

How much money do you think you’ll be earning per year in 10 years’ time? I’d love to say I’ll be making dou­ble if not more than double what I’m making now.

How often do you worry about money? Money is not something that I stress over.

How much money do you think you’d need to have the life you want? I’m not a greedy guy. Because of my upbringing, where we learned how to do more with less, and with the times and the econ­omy we live in now, my fami­ly and I could be very comfort­able at $200 to $250K a year. I could be very comfortable with that.

How happy are you, on a scale of one to ten? Eight.

Do you think your taxes are too high? Yes. Yes. Yes. Yes.


The Poverty Line (Or: $7 An Hour Plus Tips) – Demetrius Campbell, 25

Location: Chicago

Occupation: Bar-back at the Signature Lounge in the John Hancock building

Family status: Single with two daughters, 7 and 4

Monthly rent: 30 percent of income through antipoverty nonprofit Heartland Alliance

Do you keep a budget? No, but I have been working on trying to recently. I know I have to pay bills for food, for clothes, gas. It’s a lot of things that go into budget­ing. It’s hard to plan for, be­cause you never really know what you’re going to need to spend money on. And the amount of money I make var­ies, because I work different hours. The biggest two-week check I’ve had so far is $250.

I’M IN A LOT OF DEBT. I HAVE TRAFFIC TICK­ETS, HOSPITAL BILLS, OLD PHONE BILLS. I’M PRETTY SURE THAT MY DEBT FROM THE TICKETS ALONE IS ROUGHLY $3,000.

What’s a weekly grocery bill for you? In a week, about $130 to $140—that’s when I have the money to spend. I’m on food stamps, and I get $400 a month through EBT.

One thing your family needs but can’t afford: I don’t really think about stuff like that. I just try to make do with what I have. I feel like I’m just working to pay for the bills. I don’t even have time to spend with my family—to take them out to certain places.

One thing you want but can’t afford: I’d buy a newer-model car. And every time those commercials come on TV—the Pillow Pets—my kids always ask for those. It’s discouraging, having to tell them all the time that we can’t afford things.

The last thing you bought that required serious plan­ning: I bought a TV—a Black Friday deal. It’s a Vizio 39-inch. I paid like $250. I had to work for it. I saved up.

Do you have credit cards? No.

How much debt are you carrying now? I’m in a lot of debt. I have traffic tick­ets, hospital bills, old phone bills. I’m pretty sure that my debt from the tickets alone is roughly $3,000. By the time you get the money to pay the ticket, the fine has doubled. Then you get another one and can’t pay that one. Like, I’m on a boot [booted vehi­cles] list, and I got the money to get off the list, but my car got towed that morning, so I had to pay half that money to get it out of the impound. It just keeps going like that.”

Saving for retirement? No. Retirement is a long ways from now.

At what age would you like to retire? As young as I can and still have money. Probably late 60s.

College plans for your kids? I’ve thought about it. Once I get all my debts paid off and I’m in a better place, I’ll start putting as much money as I can toward it. I’ll take steps to put myself in better standing.

How much money do you think you’ll be earning per year in 10 years’ time? My goal is to triple what I’m making now.

How often do you worry about money? Always. Living like this is hard to do.

Does money ever keep you up at night? I can say that it has. It’s a lot of things building up—having the money when the bills are due, having a ticket, and not being able to pay it before it doubles.

How much money do you think you’d need to have the life you want? 50 to 60 thousand a year.

How happy are you, on a scale of one to 10? I’d say a seven or eight. But you might get lucky and catch me on 10 now and then.

Do you think your taxes are too high? Yes, I do.

Source: Esquire –INTERVIEWS BY 

Illustrations by Stuart Patience.

This article originally appears in the April 2016 issue. 

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Late payments set to rise on Canadians’ $599-billion of credit card, non-mortgage debt, Equifax predicts

‘We will start to see delinquency rates inching up a little bit, and debt probably slowing down,’ as Bank of Canada starts raising interest rates, credit agency says

Canadian delinquency rates, which have been declining since the last recession, will probably reverse and begin to climb by the end of 2018 as the central bank presses ahead with interest rate increases, according to the country’s largest credit reporting firm.

Regina Malina, senior director of analytics at Equifax Canada, predicts late payments on the country’s $599 billion (US$455 billion) of credit card, auto and other non-mortgage consumer debt will begin to move “modestly higher” by the end of this year.

“Our prediction is that we will start to see delinquency rates inching up a little bit, and debt probably slowing down,” Malina said last week in an interview.

The delinquency rate — which measures the number of payments on non-mortgage debt that were more than 90 days past due — was 1.08 per cent in the first quarter, up slightly from the fourth quarter but still close to the lowest level since the 2008-09 recession.

The Toronto-based analyst declined to estimate how high delinquencies will climb, saying it depends on the pace of interest rate increases and what happens in the trade battle between the U.S. and Canada. She cited the experience in Alberta, where delinquency rates rose in some instances 20 per cent or 30 per cent on a year-over-year basis after the oil-price collapse. Such an extreme case, however, isn’t what Equifax is predicting. “It will only happen if we start seeing deterioration in employment numbers,” she said, adding delinquencies should remain “still very low,” and “they’re just going to start inching up a little bit, probably not double digits.”

CHANGE COMING?

Household credit has ballooned to unprecedented levels in Canada, as in many other developed countries, amid historically low interest rates. That hasn’t posed too many difficulties so far, because the economy and the labour market have generated solid growth, allowing people to handle servicing costs. But with the Bank of Canada intent on raising rates and the U.S. and Canada engaged in a tit-for-tat tariff fight, that could change.

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. The 56 per cent who did so in the first quarter matched the fourth-quarter number and was down from as high as 59 per cent last year. It’s a small but important detail, according to Malina.

“The changes aren’t big, but when they’re consistent and we see it for two or three quarters, we start to believe it,” she said. “Given that less people are making their credit card payments in full, and those people are usually people with lower delinquency rates, we might be seeing overall delinquency rates deteriorating.”

A red flag in the Equifax data was a decline in the share of people who completely pay off their credit cards each month. Elise Amendola/AP Photo file

Consumer debt including mortgages was $1.83 trillion in the first quarter, up 0.4 per cent from the end of 2017 and 5.7 per cent from the same quarter a year earlier, Equifax said.

Excluding mortgages, Canadians carry an average of $22,800 each in debt. Some other highlights from the report include (all figures exclude mortgage debt):

Those between the ages of 46 and 55 have the highest average debt loads, at $34,100.

That age group is also seeing the largest increase in debt, year-over-year, at 4 per cent.

Of nine cities listed, Fort McMurray, Alberta, had the highest average debt levels, at $37,800, as well as the highest delinquency rate, at 1.72 per cent.

Vancouver and Toronto saw the highest rate of debt accumulation in the first quarter, with 5.2 per cent and 5 per cent growth from a year earlier Montreal is the least indebted city, with average debt loads at $17,300 Ontario and British Columbia have the lowest delinquency rates, at 0.95 per cent and 0.84 per cent. Nova Scotia, at 1.74 per cent, had the highest.

Source: Bloomberg News Chris Fournier

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‘Dr. Debt’ issues dire warning to Canadians

 

Scott Hannah says low borrowing costs and rising home prices have lured Canadians into a debt trap they may not escape if looming economic threats materialize.

Hannah, president of the Credit Counselling Society, is seeing an influx of clients as higher financing costs begin to bite and people find it harder to manage. Phone calls were up 5.3 percent in the first quarter from a year earlier, while online chats increased 40 percent.

He says with debt loads at a record and little in the way of savings to fall back on, Canadians may be “caught off guard” if housing markets cool significantly or North American Free Trade Agreement talks go sideways.

“We’ve been in a perfect storm for a number of years” where low interest rates encourage borrowing and discourage saving, Hannah, 60, said by phone from the Vancouver suburb of New Westminster. “People have been lulled into a false sense of security.”

Hannah’s organization can help people set up a debt management program or find a licensed insolvency trustee. He’s sounding the alarm as rising interest rates and stricter borrowing rules threaten to squeeze households even further. The Bank of Canada is expected to raise its benchmark rate twice more this year and it’s next decision is April 18.

Credit Relief

Hannah’s colleagues dubbed him “Dr. Debt” after he received an honorary degree in 2012 from University Canada West, a private business school, for his “distinguished service in the field of credit counseling.” Prior to establishing the non-profit, registered charity in 1996, he worked for 11 years at Equifax Canada, a credit reporting company, but decided “a nice title and a good salary doesn’t make you happy,” so he left to find something that “made a difference.”

He found it by helping people get relief from their creditors. As Hannah tells it, during the early 1990s, the provincial debtor assistance program in British Columbia was cutting back just as bankruptcy rates were rising. A group of banks, credit unions and department stores tried and failed to establish a complementary service. Hannah offered to raise the necessary funds, so long as he was allowed to run the organization.

Drop in the Bucket

Twenty-one years later, the society — with offices from the provincial capital in Victoria to Ottawa — has assisted more than half a million people. The average client is 43 years old, has C$31,000 in outstanding debt and seven creditors. More than half are female. Average gross monthly income is C$5,200, and housing costs consume 42 percent of their net income. The society’s clients repaid C$51 million last year, up about 6 percent.

It’s still a drop in the bucket.

Canadian household credit totaled a record C$2.13 trillion at the end of February, roughly doubling since 2006, central bank data show. Residential mortgages account for 72 percent of that. The rest includes credit cards, lines of credit and auto loans.

People carrying large debt loads still feel ahead of the game because home prices keep rising, Hannah said. “What happens when the economy has a downturn, like in Alberta. We know what happened. We’re still seeing the impact of that,” he said, adding people in the oil-rich province were “caught off guard, and because of a lack of savings, many people lost their homes, had to sell their assets and start over again.”

Read more about cracks starting to show in the quality of Canadian credit

Some observers argue Canada’s household debt isn’t a problem because asset ratios and home equity levels are also high and the country’s labor market is strong. A report from the Canadian Banker’s Association this week showed the national mortgage arrears rate through January was 0.24 percent, close to the lowest in three decades.

Hannah doesn’t buy it. Low arrears and delinquency rates “don’t tell the whole story,” because a robust housing market is masking financial strains, he said. “If a person’s had difficulty keeping up with the mortgage payment, it’s been relatively easy just to sell your home,” said Hannah. “What happens though when you have a tight market and it’s not as easy to sell your home? That’s when you’ll see delinquency rates start to rise.”

 

Source:  Bloomberg News – 12 Apr 2018 

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How new mortgage rules hammer indebted households

The Toronto housing market’s rotten January has thrown a scare into veteran mortgage broker John Cocomile.

A lot of Mr. Cocomile’s business in recent years has been mortgage refinancings, which are like a financial-stress reducer. When your household debt gets too high, refinancing takes the pressure off by folding all your borrowings in with your mortgage. What worries Mr. Cocomile is that the latest developments in housing make it much harder to refinance.

We’ve seen household-debt levels push ever higher in recent years, with no evident repercussions in terms of more people being unable to repay what they owe. Now that refinancings are no longer an easy fallback, Mr. Cocomile thinks we’ve hit an inflection point where more people will find their debt unmanageable. This could be the year debt gets messy.

A big reason why Toronto home sales fell 22 per cent compared with January, 2017, was the introduction of new mortgage regulations designed to make the housing market more stable going forward.

The rules include a stress test that applies to anyone with a mortgage that isn’t insured against default. Typically, this means people with a down payment of 20 per cent or more and people who are refinancing.

The stress test is designed to see if borrowers can afford interest rates that are higher than the abnormally low levels of today. At Mr. Cocomile’s office, a lot of people are flunking the test. He’s had 10 people contact him about refinancing this year who did not end up qualifying. “All 10 would have qualified a year ago,” he says.

Meanwhile, debt loads are getting heavier to carry. The Bank of Canada has increased its trend-setting overnight rate three times since last summer, and the cumulative rate increase on some kinds of debt is a hefty 0.75 of a percentage point.

In the past few years, Mr. Cocomile would do roughly 60 refinancings a year for people with an average $70,000 in non-mortgage debt that he summarized as “a smattering of credit-card debt, plus lines of credit.” The usual procedure was to put them in a new mortgage that included credit-card and line-of-credit debt. The logic here is that the mortgage has a much lower interest rate than other forms of debt, and payments are manageable because they’re stretched over the life of the mortgage.

Even so, Mr. Cocomile finds that clients usually have to go with a 30-year amortization in their refinanced mortgage. Paying off your mortgage over 30 years isn’t possible when you have an insured mortgage, but you can still do it with a down payment of 20 per cent or more.

Refinancings in which people increased the amount they owe accounted for 21 per cent of the one million or so new mortgages issued in 2016, the most recent numbers from Canada Mortgage and Housing Corp. show. That’s an increase of 3.8 per cent over the previous year.

You’re usually allowed to refinance no more than 80 per cent of the value of your home, a modest limitation in hot real-estate markets where rising prices have steadily handed people more home equity to work with. “People could refinance because the value was there,” Mr. Cocomile said. “They call me and say, ‘My neighbour’s house just sold for $1.7-million, can I pull some equity out? I want to do a refi.'”

Toronto real estate’s rotten January suggest people may be a bit disappointed in what their homes are worth now. The price of detached homes in the city fell 9 per cent on a year-over-year basis, even as condo prices rose 14.6 per cent. Mr. Cocomile finds that home appraisers are reacting to the current environment by getting more conservative with their assessments of how much homes are worth.

Refinancing your mortgage by folding in other debts makes sense in theory because you’re converting higher-rate debt into a mortgage, which typically has a very low rate. But a refinance does nothing to address the behaviour that leads people to over-borrow. In fact, some people have exploited rising house prices by doing multiple refinancings over time to ease their debt loads.

It’s arguably a good thing that refinancings are harder to get in 2018. With rates rising, it’s time for households to attack their debt, not accommodate it.

 PLAY VIDEO4:53
Preet Banerjee examines the pros and cons of switching to a fixed-rate mortgage.
Source:
Source: Globe and Mail –
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5 things your debt collector isn’t telling you

For starters, evening calls are off limits

1. You don’t have to pay me. In most provinces, there’s a two- to six-year statute of limitations for collecting debts that comes into play after you make your last payment. If the statute has expired, you don’t technically have to pay a cent. Be careful though: Making a new payment or a written acknowledgement restarts the statute.

2. My deadlines are bogus. “Whenever a bill collector gives someone a deadline, 99% of the time they’ve just picked it out of the air,” says debt expert and author Mark Silverthorn. He’s simply trying to create a sense of urgency to intimidate you. Your response? Keep calm and don’t rise to the bait.

3. I can’t contact you more than three times a week. After an initial conversation with you, most provinces forbid debt collectors from contacting debtors more than this—and phone calls, emails, even voice mails all count. So if a collector is exceeding this, inform him he’s breaking the law. Just the fact that you’re aware should spook him.

4. Evening calls are off limits. In most provinces, collectors can’t call early in the morning or late at night. Take Ontario, where contact between 9 p.m. and 7 a.m. is forbidden. On Sunday, it’s limited to between 1 p.m. and 5 p.m. If you’re getting contacted outside lawful hours, be sure to keep records of the phone number and time of call, and file a complaint with a provincial regulator.

5. I probably won’t be suing you. Original creditors usually decide to sue within six months and typically won’t do it for amounts under $4,000. (Worth noting: They are more inclined to sue home owners). Third-party collection agencies, on the other hand, collect commissions on the amount of arrears they can get from you, and generally aren’t in the business of suing, says Silverthorn. In fact, they pursue legal action on fewer than 10% of their accounts. “As long as you’re getting the collection calls, then you are probably not going to be sued.”

 

Source MoneySense.ca – by  

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Good debt, bad debt and good bad debt

 

Canadians owe more money than ever, but not all debt will kill you

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: MoneySense.ca – by  January 5th, 2016

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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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