Many Canadians are opening up their January credit card statements, reeling from the holiday hangover and newly acquired debt they racked up last month. It sure adds up quickly: gifts, some travel, a few nice dinners over the holidays. What would happen if credit card interest rates doubled? How many of us would fall behind in our credit card payments? It sounds horrible but rest assured it is unlikely. But it is far more likely to happen with our mortgage rates. Could you afford your home in 2016 if interest rates rise?
The likelihood of a market correction in Toronto and Vancouver is staring us down and that will have a ripple effect across the country. The Teranet-National Bank index of house prices in Canada's largest metropolises rose 6.1 per cent in November, but only Toronto, Hamilton, Vancouver and Victoria posted gains. The rest of the country's largest cities contracted. It's official: A correction is brewing.
The very policies that helped Canada weather the past few years economically have created conditions for people needing mortgages from alternative lenders. Federal regulators recently increased the amount of reserve capital the major banks must keep on hand to guard against losses, tempering banks' lending, and the qualifications for mortgage insurance have never been tighter. The maximum amortization period for an insured mortgage is now 25 years (down from a high of 40 years only seven years ago). The government also capped the amount of total debt households can carry: if your monthly mortgage payments plus your other bills amount to 40 per cent or more of your income, neither the Canadian Mortgage and Housing Corporation nor any private insurer will insure your mortgage. This collectively created a stronger market for alternative lenders. Add the numbers up: if you live in a big city in Canada, the cost to live there isn't likely far from that 40 per cent, is it?
Not only do buyers in Toronto and Vancouver pay an ever-increasingly steep price for the pleasure of getting into the market (I've heard of buyers, panicked, maxing out a pool of credit cards to scrap together a down payment -- a bad, bad idea), but they'll also pay premium interests rate to stay in the market or renovate their home. The reality is that many buyers are financially drained just by the expense of actually buying a house that if anything happens to the home, a serious repair for example, they are maxed out. What if your basement flooded? What if you suddenly need a new roof? How would you pay for that unforeseen costs?
Many of us are going further into debt to cover those costs. The latest Statistics Canada figures report that Canadians are borrowing more than ever before. Household debt is at an all-time high and what we owe far outpaces what we earn. Last fall, credit-market debt such as mortgages hit a record high, rising to 164.6 per cent of after-tax income from 163 per cent in the prior three months. Seventy per cent of all household debt in Canada is made up of residential mortgage debt -- and unprecedented high. While I'm here to help Canadians if they've gotten in over their heads, here are four tips to avoid hot water:
- Review your mortgage now, like right now, and see what you can do to plan for the future. Can you lock in? Renegotiate? It's better to act proactively, then get "caught" if the market really takes a tumble.
- Don't take on more debt than you can comfortably carry. Have an honest look at your credit cards, car payments, lines of credit and other debts.
- Stop superfluous spending, now. Ask yourself if you really need whatever you're considering purchasing. You'll feel so relieved to see your debt shrink that you'll be motivated to plan your purchases more carefully.
- If you are already in over your head, you might want to consider selling your home now while prices are so relatively inflated.
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