Canadians’ Debt Levels Still a Concern

Debt levels in Canada have been of great concern to officials for some time now. The general perception is that people in financial trouble are wildly irresponsible with their money, deadbeats, or both. While there are certainly people like that out there, the truth of the matter is that a large percentage of honest, hardworking folks are carrying around debt levels that far exceed comfortable levels. Increasingly, people are relying on such sources of easy cash as payday loans, credit cards, and lines of credits just to get by from month-to-month, with no tangible source of financial relief on the horizon to wipe away those debts.

According to Statistics Canada, for every dollar of disposable income they have, Canadians owe about $1.67. That is a substantial amount and leaves many living their lives with very little margin for error. Unfortunately, life constantly throws unexpected things our ways, like repairs, replacements, even lawsuits. Not having money on-hand to deal with such issues can lead to even bigger problems. Those may not only result in financial ruin, but declines in both a person’s health and mental health.

The main takeaway is that we need to return to the days when people’s lives were funded only by their cash flow and credit was something you used solely in times of emergency. Of course, in our consumer culture, we are constantly bombarded with advertising stating how much we need certain things, almost none of which are absolutely necessary for leading a comfortable and successful existence.

One thing that has saved some consumers is the increasing willingness of companies to negotiate proposals where the debtor would only have to pay back a portion of what they owe. This has helped reduce the number of personal bankruptcies from what they might be, though these also remain distressingly high.

What the Interest Rate Hike Means for Mortgage-Holders

On July 12, 2017, the Bank of Canada raised its key interest rate from 0.50% to 0.75%. Canada’s five biggest banks immediately followed suite, matching the 0.25% increase in their prime interest rates.

The move came as no surprise to economists, who have been predicting a rate increase for some time now in response to record-high levels of consumer spending, housing prices, and household debt in Canada. But for many ordinary Canadians, who haven’t seen rates go up since 2010, the hike is alarming.

Some of you will have already felt the effects of the change. Others are still wondering if (and how) it will impact their day-to-day lives. We’ve examined how the new interest rate will impact two key areas: mortgages and the value of the Canadian dollar, and individuals like you.

What Does the Interest Rate Do?

As Canada’s central bank, the Bank of Canada sets the overnight interest rate. This is the rate banks pay to make one-day loans to each other. When the overnight interest rate goes up, banks usually increase their prime interest rate as well – which is what happened this week.

A bank’s prime interest rate is the rate banks use to calculate a variety of loans, including variable-rate mortgages and lines of credit. The five biggest Canadian banks (TD Canada Trust, Bank of Montreal, Scotiabank, and CIBC) all had a rate of 2.70% before the change. In response to the Bank of Canada’s change, they bumped the rate up to 2.95%.

That means bank customers with loans based on the prime rate will see their interest payments go up immediately.

Value of the Canadian Dollar

After the announcement went public, the value of the loonie shot up from 77.40 to 78.70 cents on the American dollar. That’s the highest the dollar has been since August of 2016. Some economists, including Adam Button of Forexlive.com and Scotiabank strategist Eric Theoret, predict it could hit 80 cents this year.

The cause? Confidence, according to Theoret. Though markets saw the rate increase coming, people were surprised by the Bank of Canada governor’s confidence in the move. This, along with positive economic data, shows the Canadian economy doing well and recovering from the recent oil-slump.

Mortgages and Housing Market

As mentioned, people with variable-rate mortgages will see an immediate uptick in the amount of interest they pay to lenders. The change could impact those with fixed-rate mortgages as well, as they could see higher rates when it comes time to renew.

For some, the change will be difficult to cope with. 0.25% is no small increase for those who are already struggling to pay their mortgages. It will be especially difficult for would-be house flippers who purchased a second or third home at the height of the housing boom in hope of a quick turn-around, seeing as the housing market has cooled since the spring.

But that’s not the only way the interest rate hike could impact housing. The other effect is harder to predict, but sure to be felt: a shift in consumer sentiment.

Preet Banerjee, the author of Stop Over-Thinking Your Money!, predicts the rate hike will change how Canadian consumers think about spending and borrowing.

“Because interest rates have fallen, and because borrowing money has become normalized, this could represent a real problem for them because they’ve gotten used to living month-to-month, paycheque-to-paycheque as a lot of people do, with very low costs of interest,” says Banerjee.

Right now, an alarming number of Canadians are comfortable carrying high debt loads and saving little to no money each month. Banerjee argues the interest rate hike could serve as a wake-up call.

This could only accelerate the recent dip in house prices, as consumers take a step back and wait for the right time to jump into the market. With real estate and financial services making up 20% of the Canadian economy, even small shifts in the market could have drastic effects on our economy overall.

More Developments for Sears Canada

In the week since my previous post on Sears Canada, more news has come to light. While the majority shareholders in the company mull over their options, word has surfaced that the company’s pension fund may become a victim of the court-ordered restructuring.

The company announced that retirement benefits have been suspended for their employees. In addition to the loss of finances, the discontinuation of regular pension fund payout levels would likely also mean the termination of retiree health and life insurance benefits. With the pension plan currently underfunded, there is a very real chance this could occur. And you thought the loss of 59 locations, many jobs, and no termination packages was as bad as this could get?

There is something particularly despicable about robbing people of their pension benefits. The lure of a pension and financial freedom in your golden years causes many people to stay with a firm longer (sometimes much longer) than they would otherwise. That sort of employee loyalty is gained under false pretenses when you fail to protect their pensions in times of company financial strife. Sears’ problems are not the fault of their employees, but of systematic mismanagement in the C-suite. Will those men and women suffer in the same way? Probably not.

The law does not help the retirees’ case. They are considered to be the equivalent of unsecured creditors and that means their claims rank after those of banks and other secured creditors. Likely that means while they will get something, it will fall far short of the benefits they expected to receive until the end of their lives.

Such news is especially unfortunate for people this age because many are no longer in sufficient health to get a new job. This can lead to depression and anxiety woes, on top of the money concerns involved.

 

New Years Resolutions: Financial Health

debtprisonA current survey on New Year’s resolution revealed that the top items on the people’s list include financial and health resolutions. If you are one of the millions of people who are committed to be more financially responsible this year, are you also getting ready to get rid of all those debts? A similar survey from Credit.com suggests that more than 50% of those people who are determined to have some financial resolutions put more importance on paying off their credit card debts at the soonest possible time.

Credit cards are undoubtedly efficient and convenient partners when it comes to our major expenses. However, credit card related debts have been identified as one of the main reasons why a person could get a low credit rating. Credit card spending can get out of hand quickly, and yet most, if not all of the credit card companies offer more lenient payment terms. As a result, interests easily compound until it reaches an amount that a debtor can hardly afford. Paying for credit card debts could eventually mean spending for things you never had, due to the bloated interest on your original debt. With this, it only makes perfect sense why majority of the Americans want to put their credit card debts on their priority list for this year.

Like any financial decision, paying debts in bulk will not come easy. Some people may even need financial counseling in order to take that leap. But, if you are truly determined to scrap a huge bulk of your credit card debts this year, here are some practical things that you can do.

1. Re-align your budget

Coming fresh from the holidays with some bucks to spare, it’s relatively easy to think of paying all the debts. This is always easier said than done. While it is completely right to stay off-debt for the new year, it is also crucial to make sure that you have sufficient budget to get you through the year. Paying off credit card debts faster than usual will certainly compromise your usual budget, thus the need for re-alignment. Determine which expenses you are willing to compromise, or if possible eliminate. Remember to include in your budgeting the other outstanding debts that are not necessarily urgent.

2. Negotiate with your credit card companyexhausted

You do not have to bear the burdens of debts on you own. By negotiating with the credit card company, you may still be able to reduce payments for other fees, especially the extremely bloated interest rates. Most of these companies have generous offers for clients who commit to paying more than their monthly payment fees.

3. Have a fixed timeline

Be clear with how long you really want to accomplish your goals of being free from credit card debts. Realistically, you can give yourself three to six months to accomplish this. With a good negotiation, you can pay everything in a span of six months without worrying about the interest rates.

As they always say, a credit card is both the friend and enemy of your finances. With responsible handling, it can definitely be a friend. But, when things start to go out of hand, it’s important to start committing to a reform right away.