According to a recent survey conducted by Manulife Bank of Canada, over 92% of respondents believe they have too much household debt, and their debt is drastically outpacing their annual income.
Why is debt becoming a major problem in 2019 and onward?
Most people have debt, and to a great extent, having some debt fuels the economy and creates the backbone of our current banking system.
However, if we looked at a scale that reflected what would be considered low debt all the way to out of control debt in relation to annual income, it becomes evident that edging too far in the heavy debt zone creates tremendous risk of the inability for borrowers to repay loans and ultimately brings about devastating financial consequences.
The reason for massive debt could be twofold. On one hand, incomes are simply not in line with inflation and on the other, the banking sector offers many different forms of financing and credit to consumers who may not appreciate what could happen to their ability to repay debt in a rising interest-rate environment. This is especially true when it comes to mortgage loans. A survey conducted by Ipsos for insolvency firm MNP Ltd. and published by Bloomberg, articulated very clearly that many Canadians were just $250 away from insolvency.
There are two types of debt that borrowers can have.
The first type of debt is called Unsecured Debt, which means it's not tied to any chattel or asset like a car or a house, and a lender cannot launch procedures to take possession of the asset to recover damages. For example, a power of sale proceeding or repossession of a vehicle would allow a lender to obtain the asset and re-sell it in order to recover the funds lent to a borrower who could not repay their loan.
The second type of debt is called Secured Debt, meaning it is registered against property as collateral or via the Personal Property Securities Act which gives the lender a right to ownership of the vehicle or property in ways described above.
Unsecured debt carries more repayment risk for financial institutions as well as borrowers in two very different but interchangeable ways.
First off, because a lender has limited recourse which won't allow it to be able to recover the money lent (i.e. it cannot launch a power of sale or seize the vehicle if the loan doesn't have any collateral attached to it), it risks having to write the debt off off as "bad debt" if it cannot be repaid by a borrower. Millions of cases of 'bad debt" loan write offs wreak havoc on any financial system (think 2008).
According to the Office of the Superintendent of Bankruptcy Canada, insolvencies (bankruptcies and consumer proposals) increased by 11.3% in January of 2019 compared to the previous month. Bankruptcies increased by 4.2% and proposals increased by 16.9%.
Clearly, there is an increase in the number of people who cannot repay their loans which is happening in conjunction with rising debt levels year after year which are currently sitting at 171% per capita. This means for every $1.00 a Canadian earns, he/she owes $171 in debt to creditors.
The other equally paramount issue borrowers face with their unsecured debt is it's easily accessible and doesn't require much paperwork to put in place like a mortgage does, for example, which makes borrowing more tempting. It also carries steeper interest charges and other related costs.
The Biggest and Most Dangerous Debt Trap
Credit cards often become a trap - we don't have to postulate on this statement.
Credit card balances are currently charged at four to five times the interest rate of secured loans, and the interest is compounded daily. This means that if a credit card is maxed out, not only can monthly repayment be challenging because of the highly inflated interest rate, the loan can actually become impossible to pay off because interest is accumulating and compounding itself every 24 hours. And so borrowers continually find themselves in situations where they can only afford to make minimum monthly payments and, therefore, never get out of debt. Add rising mortgage interest rates to the equation, and the perfect storm ensues.
In case the picture is not clear just yet, making minimum payments year after year becomes a huge drain on a family's finances because they quite simply can never get ahead. Credit card debt is like an illness that never gets better and each year; it makes a person sicker and more and more incapable of 'living.'
But credit card loans are not the only "disease" that has negatively impacted society. Car loans are now being amortized as long as eight years and creating more financial problems for borrowers. Although approving longer amortization on vehicles makes the monthly payment appear more affordable, the reality is longer amortizations mean more interest is being paid, which ultimately makes the cost more expensive.
In contrast, home loans are amortized over a much longer period (i.e. 30 years); however, real estate is generally not considered a depreciating asset, whereas car loans can depreciate up to 20% on the date of purchase and just from driving them off the lot. Vehicles have a shelf-life so a borrower could be paying huge costs on an item that will be of no use in less than a decade.
How to Protect Yourself
It can be difficult to get out debt once you have come to a place that seems to be beyond repair. However, in order to have peace of mind and financial well-being, your debt must be drastically reduced and managed if it is otherwise deemed unsustainable.
Debt not only causes financial problems, but it also causes issues relating to a person's mental and physical health.
If you are a homeowner, your property can help you manage your debt, which will assist you in becoming debt-free. Using your property can also help you manage your monthly cash-flow more wisely, putting YOUR money back into YOUR pocket.
If you are not a property owner, consider speaking to a trustee about reducing your debt, recovering your monthly cash flow and ultimately, "cleaning your slate." Everyone deserves a fresh start with peace of mind.
You don't have to stay with the same lender when your mortgage contract renews. Many different mortgage lenders are always competing for your business.
Your bank will send you a renewal agreement within six months of your mortgage maturity date.
Here's A Good Reason Why You Shouldn't Necessarily Renew Your Mortgage Early
Mortgage interest rates constantly fluctuate as the economy changes. Most mortgage lenders will NOT note the most competitive interest rates on their renewal agreement.
The "early renewal" document hinges upon the bank's belief that borrowers feel they have been awarded a privilege of less legwork six months earlier. In reality, all lenders know that borrowers will be faced with more choices and presumably a better rate as their maturity date approaches, so locking borrowers back in earlier means locking them out of a competitive market where they will likely find a better deal.
Before you sign back, you should verify the mortgage rates and terms other lenders are offering to see if you can save yourself money over the next cycle of your mortgage. Take some time to do some research to ensure you do get the best deal and realize it may not be with your existing lender.
The majority of Canadians make the mistake of signing back their mortgage renewal agreement to their bank instead of taking the time to shop around. And, unfortunately, they often end up paying more than have to for their mortgage loan.
Why You Should Switch Mortgage Providers
There are usually two main reasons borrowers switch away from their current mortgage to another lender:
As long as you are not requesting more money, you can switch over your current mortgage to another lender and avoid paying a prepayment penalty. Getting a better rate on your mortgage can make your monthly payment lower and shorten your amortization period, which is the time remaining before you're mortgage-free.
For example, by switching over to a mortgage lender that offers an interest rate that is 20 basis points (.20%) less, you can save up to $5,000 in interest over the next two years. Also, if you decide to keep your monthly payments the same, you will pay down the mortgage principal much quicker since you will be making prepayments.
Sometimes, it makes sense for a borrower to exit out of their current mortgage contract and "switch" over to another lender if the terms are more favourable. For example, some banks only allow a 10% prepayment privilege, which means a borrower cannot repay more than 10% of the original mortgage balance within each calendar year. Other lenders offer up to 25% prepayment privilege, which gives borrowers more opportunities to pay off their mortgage faster without incurring penalties.
How To Switch Lenders
The first step you should take to switch mortgage lenders is to find a lender who is currently offering a better rate. You can search through our office, or you can search online.
Once you've found a lender who is willing to offer you a better rate, you must fill out a mortgage application.
You will require the following documentation:
Upon switching your mortgage, your old lender will be paid out, and only the mortgage amount that is currently outstanding on your existing mortgage will be transferred over into the new mortgage.
Are there costs associated with switching?
Usually, there are costs associated with switching; however, your new lender will likely cover these costs. They are approximately $850 in legal fees and $250 in discharge fees.
An appraisal may also be required, the cost of which would get covered in our "switch program."
Sometimes, switching can involve a collateral mortgage, which means your existing lender registered your mortgage differently. We can still facilitate collateral switches; however, please contact our office for more information.
Call us at (647) 773-4849 or email email@example.com
Know How Much Mortgage Interest You Will Pay Over 25 Years? Nobody Else Does Either. Here's How To Change That.
Thirty-five years is the maximum amortization period allowed in Canada. Yet, despite the registered amortization of any mortgage, the length will often fluctuate for each individual borrower. That's because some borrowers prepay their mortgage before the total amortization period has ended while others make the terrible mistake of resetting their amortization period each time they renew or refinance, which can keep them trapped in a lifetime of mortgage repayment.
Either way, not many Canadians know how much mortgage interest they will pay or that they have currently paid on their mortgage loan. This can create financial setbacks during the mortgaging process which will be discussed here.
A mortgage commitment or contract usually allows borrowers to prepay their mortgage in two different ways. The first way is through added extra payments to each scheduled mortgage payment and the second way is through lump-sum payments made each calendar year.
In Canada, although the mean amortization is quite lengthy, a mortgage is only allowed in terms, which cannot exceed 10 years. The most popular mortgage term is 5 years. In contrast, in the United States, a mortgage term is the same length as the amortization period which can simplify the math about how much total interest will be paid. This can help borrowers plan their prepayments more effectively and avoid common pitfalls that re-mortgaging and renewing present.
In Canada, a borrower could have up to 30 (think one-year mortgage terms) different mortgage terms within their total amortization period making it difficult to keep track of how much interest they are paying or have paid.
One area we see this, in particular, is mortgage renewals on the mortgage maturity date. For example, a mortgage may be initially set up at a 25 year amortization and so on the first maturity date of the first term, the remaining effective amortization is 20 years. A borrower will renew with another financial institution for a better rate but instead of renewing at the remaining amortization of 20 years, they re-set their mortgage amortization to 25 years because the monthly payments appear to be less.
What they have done in this instance is effectively reverse the progress they have made with respect to principal payments and unknowingly establish a way to pay far more interest. Remember: ‘Mortgage interest’ is considered top-heavy with most interest being paid at the beginning of the mortgage amortization period.
All things being equal, a borrower should not be deterred from renewing their mortgage with a better interest rate and with another financial institution if they are offering one since paying less interest is extremely cost-beneficial in the long run. They should, however, be extremely cognizant of the remaining amortization period at the end of their existing mortgage term and be cautious not to revert back to the original timeline allowed for repayment.
Additionally, each time a borrow renews their mortgage or refinances (borrowing more money against their property) they should obtain a copy of the amortization summary which outlines how much interest is paid during the term. If any prepayments are made during the mortgage term, borrowers should request a revised amortization summary for their records.
It’s not uncommon for banks to fail to provide revised amortization summaries to clients in person or by regular mail and the onus usually falls on the borrower to tally up the interest they are saving and paying. Of course, this can leave wide open areas for borrowers to falter on their mortgage repayment, which is the likely reason more people are indebted to financial institutions for much longer than they’ve hoped or even realize.
As a mortgage professional governed by the Financial Services Commission of Ontario, it is our mandate to provide amortization summaries at each step of the way. One of the benefits of working with an independent mortgage professional is the added service that is provided within the consultation area.
Have questions about your mortgage? Feel free to contact us at 647-773-4849 or by email at firstname.lastname@example.org.
Together, we can achieve mortgage-free for you!
The line of credit is therefore a profit-making instrument that accentuates the banking model and often at the expense of the misinformed consumer.
Major banks mandate the sale of secured lines of credit because they generate significant annual profits for banks and shareholders. According to Royal Bank of Canada’s 2016 Annual Report, RBC had secured just over $41 Billion of collateralized lines of credit products on real estate across Canada.
Because a line of credit is an open credit product, it's technically supposed to be used to borrow short-term funds that can be repaid relatively quickly or to provide an interim hedging strategy, for example, and yet, today, many borrowers are stuck making long-term interest-only payments at double the current interest rates, instead.
According to CIBC’s website, “a line of credit is for you if you want":
A borrower can indeed find all of these claims enticing but that doesn’t mean a line of credit facility remains the best financial product for them or even the wisest for that matter.
Unfortunately, there is not much research that exists that studies the spending habits via the line of credit after borrowers get approved. There is only anecdotal evidence that can be provided by the professionals who work within the financial industry who can objectively verify the results and who currently work to help borrowers who have found themselves in a hot spot.
For example, some important questions which are often not asked by financial banking representatives include:
When it comes to banks and profits, it’s evident that banks only want to make money and banking representatives are not trained to deliver the vital learning that is required to help borrowers make the best financial decisions.
Unfortunately, many borrowers currently stuck in the line of credit trap haven’t caught on to the fact that the secured line of credit product is often useless if it can’t be repaid in a short period of time (and in most cases it can't) because it will likely transform into an expensive monthly interest-only payment that doesn't pay down mortgage principle in the long-run.
The line of credit is therefore a profit-making instrument that accentuates the banking model and often at the expense of the misinformed consumer.
In closing, the financial sector is well aware of the dangers lines of credit products expose borrowers to such as “having access to additional credit that doesn’t cost anything until it can be a hard temptation to resist, especially when the interest charges on lines of credit are still low”, the impact of rising interest rates, and the inability to repay the money borrowed. And yet, despite the financial risks to borrowers, they are still sold over and over again to those who don’t fully grasp all of the benefits and disadvantages.
Therefore, if you or someone you know have a line of credit that is currently costing more money than anticipated, we can help. Contact us today.
Rbc.com. (2019). [online] Available at: http://www.rbc.com/investorrelations/pdf/ar_2016_e.pdf [Accessed 9 Nov. 2019].
Personal Line of Credit | Lending | CIBC Cibc.com. (2019). Personal Line of Credit | Lending | CIBC. [online] Available at: https://www.cibc.com/en/personal-banking/loans-and-lines-of-credit/lines-of-credit/personal-line-of-credit.html [Accessed 9 Nov. 2019].
The hidden dangers of using a line of credit to consolidate debt The Province. (2018). The hidden dangers of using a line of credit to consolidate debt. [online] Available at: https://theprovince.com/opinion/columnists/the-hidden-dangers-of-using-a-line-of-credit-to-consolidate-debt [Accessed 9 Nov. 2019].
Borrowers Can Now Get A Mortgage Loan in 24-28 hours Without An Appraisal, Lawyer Or Income Verification.
If you need a loan of $40,000 or less, here's a solution for you that doesn't require a lawyer, an appraisal or income verification.
The Prompt Financial (“Prompt”) loan has recently been made available by Prompt Financial through the broker channel in Ontario.
The main benefits of the loan, which can range from $5,000 to $40,000 (recently increased from $30,000) is the short turnaround time for funding. Funds are directly deposited into a borrower's account in 24-28 hours. In addition, borrowers can be approved without income verification, a property appraisal or even the need to incur costs associated with hiring a real estate lawyer. Add this to the fact that it reduces the total cost of borrowing, the Prompt loan is surely a win.
In order to qualify, borrowers must meet the following requirements:
Why is the Prompt loan better than a private mortgage?
Although private mortgages are usually approved based on equity alone, which does make it easier for borrowers to qualify, a private mortgage still requires an appraisal and a lawyer to register the mortgage on title.
Additionally, private loans have stricter, more rigid terms. For example, most private lenders do not allow prepayments without a three-month interest penalty and tend to include other built-in costs in the commitment which can drive up the total cost of borrowing. Although Prompt’s loan also has fees involved, the base interest rate is substantially lower than that of a private lenders’ and it is considered “open”, which means it can be repaid at any time during the term without penalty.
If a borrower requires $40,000 or less, the Prompt loan is a no-brainer.
If a borrower is looking for a loan that is $40,000 or less, the Prompt loan can be a very convenient solution.
Private mortgages can take weeks to administer and fund due to the different steps needing to occur in order to successfully complete funding.
These can include an appraisal being completed to verify property value, the time it takes the mortgage file to be sent to a lawyer (sometimes two lawyers when a different lawyer is required to act on each side), the final signing at the lawyers’ office and the completion of final registration through land titles. In contrast, the Prompt loan is deposited directly into a borrower’s account within 24-48 hours without the added legwork and timelines.
It Saves Borrowers From “Breaking” Their Existing Mortgage.
Most borrowers tend to seek out refinancing when they need some extra funds to perform a complete debt consolidation, or to fund a project such as a renovation or a child’s education. Refinancing can be costly because in addition to having to pay for an appraisal as well as a real estate lawyer to register the new mortgage on title, borrowers are often subjected to prepayment penalties by their existing financial institutions which can range from a few thousand dollars to $20,000 or more depending on their original mortgage amount and the interest rate differential calculation charged by their financial institution.
When the penalty is deemed too costly, borrowers tend to be inadvertently pushed to borrow from alternative or private lenders which can add substantial costs to the entire mortgage process.
The Prompt loan allows borrowers to access money quickly and conveniently without sacrificing the interest rate held on their first mortgage or paying any penalties to break it early.
What Are Some Reasons Someone Would Need A Prompt Loan?
The Prompt loan can provide fast money in the following situations:
How To Apply.
It’s very easy to apply for a Prompt loan. Simply fill out the application HERE, and have the following documents on hand.
Driver’s Licence or other Government-issued identification.
Once the application is completed, we will call you to finalize the process on the same day. If approved, funding will be completed within 28 hours right into your bank account.
In Canada, the minimum downpayment required to purchase an owner-occupied home is only 5% of the purchase price if it is under $1M. Yet, despite the requirement, many purchasers still want to know how much they “should” put towards their purchase price if they have more than 5% down.
In the past, the general mentality about mortgage loans was to pay them off immediately because having a larger mortgage meant much more interest paid to the banks, especially if it was amortized out over twenty to thirty years.
But with mortgage interest rates at an all-time low, does this approach to paying off one’s mortgage still work and make sense? If investments can now yield 7-13% returns, would it make sense that someone pays 3% in mortgage interest, instead?
A common reality that home buyers experience is becoming “cash poor.” According to the Vancouver Courier, “Over half of Canadians live paycheque to paycheque, and carry credit card debt.”
Therefore, it’s important that a purchaser asks two fundamental questions: 1. How much money down is absolutely required to qualify for a mortgage? and 2. Is there any possibility of keeping a portion of it in the bank instead?
Why it's smart not to deplete your savings account on closing.
Unforeseen circumstances are often lurking around the corner after the purchase of a new home such as unexpected maintenance costs, repairs or some other financial emergency. Without a rainy day fund to combat the unpredicted, homeowners can easily fall prey to the “credit card trap”, having no choice but to tap into their credit cards to pay for the expenses, and can therefore get stuck making minimum payments.
Depleting one’s savings is never a good idea and it’s important to understand all the options that exist when purchasing. Speak to a mortgage professional like myself about qualifying, and how much of a down payment is required.
A common misconception is that borrowers have to use all of their savings towards their down payment but it may be possible to set some of it aside.
Maintaining liquidity is very important and should also be considered when making an offer to purchase and contemplating one’s downpayment.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929