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Homeowners worried about paying down debt as interest rates go up

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This story is part of a series we’re calling Debt Nation, looking at the state of consumer debt in Canada. Look for more coverage in the coming days, including on car loans, mortgages and credit card debt.


Many Canadian homeowners are worried about rising interest rates and how they will impact their budget, a new CBC Research survey finds.

Thanks to years of access to cheap money, household debt has ballooned in Canada. Now that interest rates are rising, there are mounting concerns over how people will continue to pay down mountains of debt.

Out of 1,000 Canadian homeowners surveyed online between Oct. 5 and 11, almost three-quarters of those with debt on their home — mainly mortgages — confessed they’re worried about rate hikes.

It won’t take much for most of them to feel the pinch: 58 per cent of respondents said an increase of more than $100 in their monthly debt payments would force them to change their spending habits to make ends meet.

Certified financial planner Shannon Lee Simmons says many people who come to her for help are in a similar predicament. 

“I see that on a daily basis from clients who make relatively normal living wages, but everything is just budgeted to the dollar,” she said.

“If you were to ask them, ‘Can you save $100 bucks a month?’ they might fail at that.”

We want to hear your debt confessions. Post a short clip, maximum 15 seconds, to your Instagram Stories and be sure to tag @CBCNews and use the hastag #DebtNation. We’re looking to feature the most compelling on CBC News Instagram and CBC News throughout the week. Learn more here.

Simmons says part of the problem is some homeowners have never experienced a significant rise in interest rates.

“If you’re 40 right now and you bought your house at 30, you’ve pretty much had a decade of relatively low [rates] and that’s all you’ve experienced.”

Certified financial planner Shannon Lee Simmons says homeowners need to prepare for the true cost of rising interest rates. (Shannon Lee Simmons)

Indeed, a 40-year-old would have been a toddler in 1981 when Canadian banks’ prime lending rate shot up above 20 per cent. Conversely, since 2009, it has ranged between 3.70 and 5.75 per cent. Banks use the prime rate as a base to set their lending rates. 

Failing to budget for heftier mortgage payments could lead to even more hardships, such as homeowners digging into their savings or turning to credit cards to make ends meet.

“It leaves it rife for credit card debt,” said Simmons, founder of The New School of Finance, a financial planning firm in Toronto.

Not concerned — yet

The CBC survey findings come at a time when the Bank of Canada has already hiked the key interest rate four times since July 2017, from .50 to 1.50 per cent. The key rate influences the rate that banks charge for consumer loans and mortgages. 

Many homeowners likely haven’t yet felt the full effects of the rate hikes because they’re still locked into a fixed mortgage, the most common type in Canada. 

When their mortgage is up for renewal, “they might be in for a bit of a shock,” Simmons said.

The market expects another rate hike on Oct. 24, and some economists predict three rate hikes in 2019.

Bank of Canada governor Stephen Poloz says he believes Canada’s debt risk can be managed successfully. (Justin Tang/Canadian Press)

Meanwhile, the amount of debt Canadian households owe has been on the rise for about three decades, totalling just over $2 trillion in August. Mortgages make up close to three quarters of that debt. 

For years, the Bank of Canada has expressed concern over rising household debt levels. In 2011, Federal Finance Minister Jim Flaherty tried to temper borrowing habits with tighter mortgage rules.

They included lowering the maximum amortization period and requiring borrowers to qualify for a five-year, fixed-rate mortgage, even if they chose a variable mortgage with a lower rate.

But interest rates remained low and Canadians continued to pile on debt.

COMING UP IN THE DEBT NATION SERIES:

  • TUESDAY | Why long-term loans are the fuel that’s powering Canadian car sales
  • WEDNESDAY | Full news coverage of Bank of Canada announcement on interest rates
  • THURSDAY | CBC business reporter Peter Armstrong takes a look at the current state of household debt in Canada; Don Pittis analyzes what the Bank of Canada news means for Canadians’ finances
  • FRIDAY | CBC business columnist Don Pittis explains why credit card debt can be a dangerous trap

Wrong answer

According to credit agency TransUnion, Canadians owed an average $260,547 in mortgage debt in the second quarter of 2018 — a 4.76 per cent jump compared to the same period in 2017.

In the CBC survey, 36 per cent of respondents said they had no debt on their home. Forty-two per cent said they owed between $50,000 and just under $400,000 when combining both a mortgage and lines of credit. 

Most respondents said they are very or somewhat comfortable with their current monthly payments.

However, as the survey shows, for many, that level of comfort diminishes when faced with the prospect of higher rates.

And the impact could be more severe than some people think: When presented with a couple mortgage scenarios, less than a quarter of respondents were able to correctly estimate the added cost of a two per cent interest rate hike.

Take, for example, a $400,000 mortgage with a 20-year amortization and a fixed five-year rate of 3.3 per cent. With just a two per cent rate increase, monthly payments would go up by about $400 a month.

Simmons says many people find making the calculations daunting, but that homeowners need to understand the true cost of rising rates.

“Everyone is aware they’re going up, I just think that people aren’t necessarily prepared for how that impacts their daily life.”

It’s important to note that even with a projected rise in interest rates in 2019, they’ll still be relatively low compared to previous decades.

The Bank of Canada raises the country’s key interest rate to keep inflation in check, but governor Stephen Poloz said in May that the bank will make rate decisions cautiously, considering the amount of debt households are still carrying.

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11-Step Guide to Buying A House

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Purchasing a home is likely going to be one of the largest purchases you will make in your lifetime, which is why it is so important to follow the right steps when starting on your home-buying journey to ensure that the entire process goes smoothly from start to finish!

We’ve put together a step-by-step guide to buying a home, to help you get off on the right foot when it comes to buying a home. Click the download button below to download these steps in PDF form.

1. Decide to buy a home

Make sure you are ready both financially and emotionally!

2. Get Pre-Approved

Work with a mortgage broker or your bank. They will work with you on what you require to submit an application. Once approved, this will determine how much you can afford to spend on a home.

3. REALTOR® Consultation

Work with a RE/MAX agent to help guide you through the process. The right agent will discuss your price range, ideal locations, current market conditions and much more!

4. Start Your Search

Your REALTOR® will get you information on new homes that meet your criteria as soon as they’re listed. They’ll work with you and for you to ensure you find your dream home.

5. Current Market Conditions

Your experienced RE/MAX agent is a valuable resource as you consider different properties. They will be there when you have questions regarding the homes you’re interested in – they can tell you what is a good deal, and when to walk away.

6. Make an Offer

Your REALTOR® will help create your offer tailored to your needs including the right subject clauses down to the closing date that works best for you.

7. Negotiate

You may receive a counter offer but don’t be worried! RE/MAX agents will negotiate for you to ensure you get the best possible price for the house you love!

8. Accepted Offer

It’s crunch time! The next few weeks are busy as you need to schedule and remove every one of your subject clauses by the specified date. You’ll likely need to schedule an inspection, appraisal, financing approval, and several others. You will also need to provide a deposit to put down on the home. The deposit will be a pre-determined amount given in-trust to your REALTOR® to show the sellers you are committed to this home. Don’t worry, that money goes towards the purchase of said home if all goes well! This is a busy time but be sure to reach out to your RE/MAX agent if you have any questions or are unsure about next steps.

9. Subject Removal

Once you have completed all your subject clauses, and everything went smooth, it is time for you to sign on the dotted line and consider your new home to be yours (almost!).

10. Official Documents

You will need to provide your RE/MAX agent with your preferred lawyer or notary to have the official title transferred into your name. You will meet with the lawyer or notary in person to sign all the legal documents before you move in. This typically happens a few days before you take possession of your new home.

11. Move In!

Congratulations, you are officially a homeowner! The date pre-determined by you is your move-in day! You can now move into your new home. Your RE/MAX agent will be there ready and waiting to hand you the keys. Enjoy!

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Know When to Rent ‘Em, Know When to Buy ‘Em

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We’re told it’s always better to buy than rent. Everyone—from our parents to the banks to the government—encourages us to buy, buy, buy our homes.

But times have changed, and I dare say that these authority figures might be slightly out of touch. The jaw-droppingly high cost of real estate in big cities is encouraging millennials to rent instead of own, causing homeownership rates to drop. At 30 years old, 50.2% of millennials own homes versus 55% of baby boomers at the same age. As a millennial homeowner, I can’t help but wonder if I’m generationally displaced.

There’s an old misconception out there about renting that needs to be addressed. You’re not “throwing away your money” if you’re renting. While that familiar axiom might be true sometimes, there are plenty of circumstances in which it does actually make more sense to rent than buy.

You Might Choose to Rent If…

…You Invest What You Save

Renting tends to come with lower carrying costs than owning. Typically, all you’ll have to worry about paying as a renter is, well, the rent (clearly) and perhaps a share of utilities. This leaves you with extra monthly cash to invest, which can ultimately put you on even financial footing or better with a homeowner.

As always, there’s a familiar caveat here: You need to be financially disciplined for this strategy to pay off. One mistake I see a lot is that those who rent tend to fall prey to something called ‘lifestyle inflation.’ Rather than investing what they save as renters, they just rent nicer apartments, eat at fancier restaurants, and put more money into their wardrobe than their RRSP. But this money vacuum can be easily avoided by:

1. Budgeting to find out how much you have left over to invest each month after factoring out all your expenses, then;

2. Funneling that leftover money directly into your investments. Some robo-advisors, like Wealthsimple, allow you to do this automatically via pre-authorized contributions, which set recurring transfers from your chequing account into your investment portfolio, at whatever amount and interval you choose.

…You Have Rent Control, aka the Urban Holy Grail

Depending on where you live, you might be lucky enough to benefit from the urban miracle known as rent control. That means your landlord can only increase your rent by the rate of inflation, which in turn keeps your cost of living way down and leaves you with more money to invest. In Canada, rent control is now implemented in most big cities like Toronto and Vancouver (although not in Montreal).

…You Have a Mobile Lifestyle

Renting makes it easier to move; if you’d like to relocate it’s usually as simple as giving your landlord 60 days written notice. But when you own a home you’re more tied down, and the obligation to be near your property may prevent you from chasing new adventures in faraway lands. I once turned down a fantastic job opportunity in Dallas, Texas for this very reason.

…You’re on a Tight Budget

Renting tends to be more affordable than buying in big cities like Toronto and Vancouver. I know, I know, renting is still unreasonably pricey in certain neighborhoods. But buying in those same areas can be arm-and-a-leg expensive.

When you rent, all you have to come up with is the first and last month’s rent; no need to scrimp and save to pull together a massive down payment on a house, which, incidentally, will take you two to four times longer to save than it did your parents.

And homeownership leads to a lot of other costs aside from mortgage payments. When you buy real estate, you’ll need to pay closing costs, which typically add up to between 1.5%–4% of the property’s purchase price and can include a home inspection fee, real estate lawyer fee, land transfer taxes, and homeowners insurance (sometimes you’ll have to fork over an entire year’s worth of home insurance as one lump sum).

There’s also the elephant in the room that nobody likes to speak about: repairs and maintenance. Homeowners are responsible for paying the big bucks for costly home repairs, such as a new roof and furnace, and are advised to set aside 3–5% of a home’s value toward home repairs and maintenance each year. Renters, on the other hand, can just call their landlord whenever they need repairs (provided the landlord actually picks up). Still, it’s important that tenants know their rights when renting to be aware of which fees do and don’t fall under their responsibility.

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A Montreal Real Estate Broker Answered 5 Qs About Buying A Property To Rent Out

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You’ve probably heard that Montreal’s real estate market is on fire. But how can you get in on the action? According to Alex Marshall, a local real estate broker, buying a property as an investment for the purpose of renting it out is a great way to go about it.

Marshall, who’s part of the Keller Williams Prestige team, sat down with us to explain why and how to purchase an investment property. These types of properties are also known as revenue properties.

Why do you recommend buying a revenue property?

Marshall used personal experience to highlight the advantages of owning a revenue property. He’s currently renting out the Saint-Henri loft he bought in 2010.

“Not only is my tenant paying off my mortgage, but I’m making a couple 100 bucks a month as well,” Marshall said.

Marshall was also able to take out a line of credit on the property, he said, and use the equity to buy an additional property.

“You actually don’t need to live in the property that you buy. I’m seeing clients who are in apartments with low rent [who] don’t want to move but have got the money right now … and are looking for smart ways to invest,” he said.

What are some tips to help people save up for a revenue property?

When Marshall was saving up to buy his first property, he said he worked a second job. 

“There’s a lot of value to having that side hustle … even if it’s at Subway or it’s at a landscaping company on Saturdays. It will add up significantly in the long run,” he said.

He gave the example of adding $5,000 to your annual income.

Marshall said you can qualify to borrow roughly four times your annual salary for a mortgage so $5,000 could actually provide you with an extra $20,000 of buying power.

“That might get you a second bedroom, that might get you a parking spot, that might get you a larger space,” he said.

The pandemic, Marshall said, has also helped some of his clients save extra funds.

“You can’t travel, you can’t go to the restaurant, you can’t go to the theatre, you can’t go to the bar. So a lot of people right now are finding themselves with almost a disposable income,” he said.

Marshall also recommends looking into Canada’s Home Buyers’ Plan program, which allows you to withdraw up to $35,000 — — tax-free — from your registered retirement savings plan (RRSP) to put toward buying or building a qualifying home. 

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