The Financial Rebellion

So to my fellow Canadians, remember that tomorrow is the final day to pay your taxes!  If you pay late, you are penalized 5% of our outstanding payment plus 1% for everything month you are late. Here’s a reference…http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/ntrst/menu-eng.html

If for some crazy reason you haven’t completed your taxes already, check out Studio Tax.  It’s a free fully certifed tax return program.  This company doens’t charge for the program so make sure you set them up with a donation if you like and use the program.  Here’s the link to their site…..http://www.studiotax.com/en/main.htm.

I sadly owe, so I will be making my payment tomorrow.  For those of you with tax refunds, I’ll write an article soon on what to do with the money, and I promise it’s more than just the usual “save it!” advice we are given sometimes.

A recent hot topic has been the amount of debt that Canadians.  According to recent articles I’ve read, average Canadians have a debt to income ratio of 151%.  That means for every $1 dollar that a Canadian makes, they have $1.51 worth of debt.  This is actually above what the average that Americans had when the bubble burst and everything crashed in 2008.  While this sounds terrifying (and I do think it’s a scary statistic), there is more to it than that.  Like all stats, you really have to peel away some of the layers to see what is happening.

First, as everyone knows, not all debts are equal.  Here in Canada, we have a higher percentage of homeowners, which would result in larger mortgages.  $100,000 in mortgage debt is ALOT different from $100,000 of credit card/line of credit debt.  Completely different scenarios, yet when these stats are published, they are all lumped together.  Furthermore, when comparing US mortgages lending practices to Canadian lending practices, Canadian mortgage lending is much more conservative, and more stringent then our friends south of the border.

One of the ideas that Federal Government is thinking about is reducing the amount that Canadians can borrow against their homes on Lines of Credit.  These Home-Equity Lines of Credits(also known as a Heloc) allow a person to use the equity in their home to borrow money.  From personal experience, I often see people do this to pay off credit cards, and other forms of higher interest rate debt.  Currently, a person can borrow up to 80% of their homes value in this Heloc product.  One of the things that is being thrown around is that we reduce that number to 65%, which “SHOULD” reduce debt as people can borrow less.  This absolutely makes sense.  People would have less debt if they are allowed to borrow less on their homes.

Now here is my issue with this.  While I do have concerns over the amount of debt that Canadians are carrying, and this is by no means down playing that, my larger concern is the amount of money that Canadians spend on their debt every month.  Just say a person makes $5000 a month.  They owe $100,000 in debts.  $75,000 on a mortgage, $5,000 on credit cards, and $15,000 on a line of credit.  To pay all these bills, this person has to pay $2500 a month.  In a different scenario, this person still makes $5000 a month.  However, this time they only have $50,000 on their mortgage, $15,000 in credit cards, and $20,000 on a line of credit.  Now while we have limited the amount this person can have on their mortgage, by doing this, this person has still overspend and has a larger proportion of their debts on higher interest debt products like credit cards and line of credits, they end up having to pay $2700 a month.  In scenario 2, while the person owns more of their home, their monthly payments are actually higher then scenario 1.  I am most concerned about this scenario.  As rates start to move up, I am more concerned with the ability for Canadians to pay their debts, then the actual amount of debt they have.

Instead of focusing on the amount of debt that Canadians have, perhaps we should focus on the amount their debts cost them.  Instead of reducing the amount of money people can borrow against their home, we should look to limit the amount that people can qualify based on their income to debt payment ratios.  If 50% of your income goes towards paying the minimum payments on your debts, I do not really care how much debt you have because you are most likely never going to be able to reduce your debt and that is something we should all be concerned about.

The Financial Rebel

So i’ve been lazy about doing posts as of late…went on a vacation, then the markets crashed so I went and hid under a rock for a bit. 

The last few business days have been horrible for the stock market.  With the most recent unveiling that the S&P decided to reduce the USA’s credit rating from AAA to a measly, not worth mentioning AA!  The horror!  That or that rating is almost meaningless.  S&P reducing the rating of the US feels almost more of a power play then anything of any true significance.  The US has the largest ability to make money of any country in the world right now(raise taxes), and they will raise taxes well before they ever default on their debts.  If the US ever defaulted in their debts, then there would be a reason to panic.  They are still the worlds largest economy, and whether or not we want it, the world heavily relies in their economy. 

Over the past few days, we’ve had a market crash, or correction, or whatever you would like to call it, but this is nothing like what happened in the financial crash 2 years ago.  There were much larger problems then, and while we are in a situation of uncertainty, this really feels like an over-reaction.  These over-reactions have been happening a lot since the financial crisis.  When good news comes out, everyone gets too excited and buys!  The smallest bad news, and everyone panics and sells off.  While this is more than just small bad news, it’s nowhere near justifies what’s happening in the markets the past few days. 

While I’m not quite ready to start buying more today, I know I’ll be watching the markets very closely in the next few days and look to buy some great companies and much cheaper prices.  When milk goes on sale, I always buy
The Financial Rebel

So it looks like Bank of Canada went ahead and kept their prime rate at 1% meaning prime rate at financial institutions should still be 3% today(it’s always Canada’s primate rate plus 2%).  Everyone is still quite scared of moving rates up with so much uncertainty in global economics.  It’s hard to go into any news outlet and not see something about a country potentially going into defaul.  It’s weird because a few years ago I’m sure most people didn’t even think a country could go bankrupt!

There was no news about rates not moving up….it was sort of expected and would have been quite shocking had they gone up.  The interesting part was what Mark Carney(Bank of Canada Governer) alluded to going forward.  Reading a bit into the wording of his statement, it would appear we should expect a rate hike in the near future.  With inflation sitting around 3.7%, we could potentially see a rate hike next quarter….but maybe another country will try to go bankrupt and stop that, so who knows!

Knowing that, for anyone who is on variable mortgages currently, might not be a bad time to compare your variable rate to a fixed term.  I’ve seen some ridiculously low fixed term mortgage rates in the past few days.

The Financial Rebel.