From February 19, 2011
A little over a month ago Canada’s Finance Minister Jim Flaherty announced some changes to regulations surrounding government backed mortgages. Specifically, these mortgages can no longer exceed a 30 year amortization, and if using home equity to refinance existing debt, only 85% of the home’s value can be used. Currently we can use up to 90%. Commenters on the Winnipeg Free Press’s website were mixed, but one person ranted about how the government shouldn’t talk about the average Canadian having 148% of their income in debt. They blamed the whole thing on high housing prices. Undoubtedly this is part of the issue, but it is only the tip of the iceberg.
What I think that commenter failed to realize was the change in consumer credit habits over the last few decades. Yes housing prices have gone up, but he way we treat the mortgages associated with those houses has also changed. A mortgage used to be the only credit people had. The married couple would save up their down payment and buy their house. They would pay it down and eventually pay it off. Only when the couple became too old to stay in the house, or if they died, did the house change hands. These days, some people move more than they change their underwear. But even that isn’t the salient point. The reason for the new regulations has less to do with housing prices, as it does consumer debt: credit cards, lines of credit, loans, overdraft: those sorts of things. People are relying less on saving their money and more of the buy now, pay later principal. I know, I had that mentality all my adult life and I’m still digging myself out from it.
Credit is a wonderful, wonderful thing to have, but it is a privilege, not a right. Far too often I talk to people who seem to demand that we extend credit to them and they simply don’t qualify. In most of my cases the reason they don’t qualify is because they have been irresponsible with their credit in the past, but a close second is the fact that they simply have too much owing to other places, and little savings to back it up – again I’m in that boat myself right now – and the only way we are able to help people is by securing the debt against their homes.
I will be honest in saying that mortgages scare me, both because of the amount of money owed, and because of the length of time it takes to pay it back. Having said that though, home equity is a great thing to use if you want to get rid of other debt. Here’s the problem, though, and this is why the government has stepped in: people are traveling in a viscous circle and digging themselves in deeper. They will max out their credit cards, or get too many loans that they can’t afford. Then they will go to their financial institution and ask to use the equity in their house to consolidate all their debts. Its a great option: lower monthly payments, lower interest, wonderful. If they were just doing it once, or even twice over the life of the mortgage there wouldn’t be any problem. What seems to be happening though, from my experience, is that people will have these other products closed (i.e. credit cards) and then will go and get more cards and repeat their patterns, thereby never paying off their mortgage. Essentially they aren’t learning anything, and therefore are likely to die owing money to the bank. If we owe anything on a mortgage by retirement age it should be minimal, not still in the hundreds of thousands.
My own opinion, both as a credit specialist, and as a casual observer, is that this current credit crisis is endemic of the larger irresponsibility many of us have when it comes to managing our finances. Using credit in and of itself is not a problem. I can even understand maxing out your card (s) in certain cases. What we should be doing, however, is then working on paying down the card (s) before using them again, rather than making minimum payments, or just a little over, and carrying a balance indefinitely. All that does is make the banks rich and weaken our financial situation. This is the whole reason that bankruptcies are on the rise, and I shouldn’t need to tell you that once you have a bankruptcy your chances of getting credit drop dramatically, especially if your reestablished credit is not stellar.
Here’s what I propose, this is coming as someone who watches Til Debt Do Us Part, who is currently digging herself out of a whole hell of a lot of debt, and as someone who deals with the granting of credit everyday:
- Develop a budget. Sit down one day or one weekend with all your bills and pay stubs and come up with a reasonable budget that you can commit to.
- If you have existing debt: find out exactly what you owe and to whom and what sort of interest rates they’re charging you. Within your budget figure out a debt repayment plan that will allow you to pay minimum payments on all the lower interest items, and put the bulk of your money on the higher interest items to pay them off faster. Once you’ve got one paid off then do the same with the next highest interest, etc.
- Save! Whether its in a registered plan like an RSP (great because it decreases the amount of your income going to the government) or a TFSA, or just in a regular savings plan, it doesn’t matter. Boosting your savings helps you to attain those things you want faster, and without having to rely on credit. Think of it this way, too. With credit you pay the bank/company, but with savings the bank pays you. Excellent!
- If you find yourself in a pickle and you have to refinance into a loan or your mortgage, make sure that all of the items being paid off are closed, and don’t apply for new credit until you’ve at leas paid down the mortgage to where it was, or until you’ve paid off the loan (that’s where I made my mistake. I’d be debt free right now if I took the advice I just gave you).
So ultimately, the biggest takeaway I want anyone reading this to have is: we as consumers are ultimately responsible for our credit crises. The banks and finance companies can offer us all the credit they want, but we do not have a gun held to our head to take it. Use some restraint and discipline and you’ll be much better off for it.
Legal Disclaimer: These views are solely mine and in no way am I espousing the beliefs of any financial institution.