It's fair to say that as of today, Monday March 30, 2020, there are a lot of questions occupying space in our minds. How long will this last, what is happening to the economy, the housing market, home values, job recovery to name a few. Most notably, Canadians are stressed about finances and for many people the idea of having a stash of emergency money to get them through tough times has never been more prevalent.
Let's not kid ourselves, the majority of Canadians carry an excessive amount of consumer debt. In fact, according to Equifax, Canadians carry an average of $23,800 in consumer debt (not including mortgages) per person. In Alberta, we have the highest level of consumer debt in the country with an average of $29,076 per person as of Dec 31 2019. Data from Equifax's fourth quarter of 2019 shows people in Calgary have an average debt of $29,789 and in Edmonton, it's $28,350. Up north in Fort McMurray, the average debt in Q4 of 2019 was $39,674.
Perhaps most shocking about these statistics is the average debt per age range. While one would assume that debt would be concentrated on younger people starting out, it is in fact 46-65 year old's that carry the highest amount of consumer debts. Which is particularly troubling when we consider that in theory, this age bracket should be the wealthiest of all Canadians, at the peak of their career's earning potential, children have grown up, homes are paid for, expenses reduced.
The troubling part of carrying these excess debts is obvious to most: High interest rates, high monthly payments and presumably not much savings in the bank to make these payments during times of job loss or reduced wages. The last item being the one hitting homes the hardest at this point in our history. Canada saw over 500,000 applications for Employment Insurance in one week. A dramatic increase over the regular 64,000 applications on a normal week at this time of the year. This of course, is fueled mostly by the layoffs from COVID-19 employer shut downs but also from the record setting low oil prices which are anticipated to have longer far reaching effects on our economy. Particularly for those Albertan's carrying excessive levels of consumer debts.
Tough times are not a foreign concept for Albertan's, we have been here before and our resilience is a testament to the grit and integrity of our people that is such a discernible trait it is recognized across the country. We are, after all, the province that turns sand into fuel, some might argue we don't do anything the easy way.
For many, who were already struggling through the last 4 years of economic downturn in our province, you may be wondering 'what next'and while I may not have an answer for that question, I can certainly offer some information to help you get through the coming months of uncertainty.
Mortgage Deferrals You have likely heard this phrase a lot in the media lately as the Federal government announced an unprecedented move to help Canadians stay in their homes. Up to 6 months of mortgage deferrals to help ease the burden of looming mortgage payments when faced with uncertain incomes. You may have also heard or read about a million conflicting statements and news articles about how this is rolling out, how interest is calculated, if this will affect your credit score, if you qualify, which lenders are doing it etc. First things first, every lender is different. No 2 mortgages are the same and every request is being handled on a case by case basis so it is impossible to predict whether you will receive the full 6 months. For 99% of mortgages, any agreed upon deferral of payment will not affect your credit score. The key here being 'agreed upon'. You must make arrangements with your lender to defer payments, or else they will be considered late if the payment is returned NSF. If you really think about it, deferring your mortgage is the cheapest money you will ever borrow. Yes, there will be interest still accruing on your mortgage over the payment deferral period, however, that interest is more than likely sitting in an interest rate around 2.5 - 3.5%. Comparing this to the interest rate on your personal line of credit, credit cards or vehicle loans and fundamentally you can not borrow money this cheap anywhere. I'm sure even the bank of mom and dad comes with a bi-weekly time commitment that some might argue is worth more than 2.5% (tongue in cheek of course - I love my parents). Interest will accrue and your lender will do either one of 2 things, they will either increase your mortgage payment for the remainder of the term you are in (typically a 5 year term) to make up the difference of the interest over that period. Or they will increase your payment over the remaining years of the mortgage itself (typically in a 25 year amortization) which would equate to a minimal payment increase. If you are in a position where you are worried about paying your mortgage right now then yes, you should defer your mortgage payment. You would not be alone, it is estimated that 30% of mortgage holders in Canada are going to be deferring mortgage payments in the coming months.
Refinancing Your Mortgage
If you have not yet been laid off, but are concerned that may happen in the coming months you may want to get a head start on preparing by looking at the option of refinancing. In order to refinance you must have at least 20% equity stake in the home based on the current appraised value. In short, the difference between what your home is worth and what you owe.
If you have sufficient equity stake or more, you could refinance the mortgage to borrow cash back out against the house or you could push the amortization back out to 30 years to get the lowest payment possible, or a combination of both. This could be a good way to pay off consumer debts, consolidating them into the mortgage in order to cut down on monthly debt payments or high interest. You may also choose to take the cash as savings for emergency money. Even if you don't have enough equity to pull any cash out, even just pushing out the amortization to get the payment down could free up a few hundred or so of additional cash on a monthly basis.
Renewing Your Mortgage
If your mortgage renewal is coming up in the next couple of months you might be a little uncertain how that will play out, especially if you have been laid off recently.
If you have been laid off, you will likely be out of luck for shopping around for your mortgage renewal. In order to transfer your mortgage to a new lender, you do have to re-qualify. Which could mean you are stuck with your existing lender if you are unable to show current employment.
Rest assured though, that you do not need to re qualify with your existing lender at renewal. So, as long as your mortgage is in good standing with them, you should be offered a renewal option which you can sign for and carry on. If the lender is offering less than favorable interest rates for the renewal you can always try to negotiate them down. You might also want to look at signing into the variable rate option which gives you a much lower penalty to break out of. So say 6 months down the road you are back at work and interest rates are great you can look at breaking that existing mortgage to move to a more favorable rate with a minimal penalty at that time. Of course, if you are still employed you can shop around for your renewal rate as per usual.
Moving Forward
In all of the uncertainty, one thing is becoming clearer, we cannot continue to spend at a rate beyond our means. The days of the 'Alberta advantage' may well be behind us and as a province we need to adjust to the new reality of looking at the bigger picture when it comes to our finances. You do have options and you can get a handle on your debts by evaluating your personal situation and making some changes. Some of them might be sacrifices. Downsizing the vehicle or house for example does not fill one with joy, but alleviating the stress of financial burden in the short term to set you up for success in the long term is never a bad thing. It is time to dig the heels in and use a little bit more of that grit to get through. More than anything, know that you are not alone in this. Hundreds of thousands of Albertan's and Canadians are going through the same hard decisions as you are and there are numerous support networks and financial planners out there to help guide you through your choices. And try to remember (if applicable) that you and your partner are in this together. Finger pointing and arguing doesn't help you get out of debt or set you up for success, it is important to work together for the sake of your finances, your relationship, your happiness, your children and your future. Stresses are running high for everyone, now is the time to hold each other not push each other away.
If you want a non-biased look at your situation, I am always here for you. call anytime at 780-720-4034