CanEquity Blog on Financial Planning

BMO Financial Group, in an effort to educate consumers in financial literacy, is issuing one money management tip per week during 2012. The latest: Pay down debts before a rate increase.

One of the best ways for Canadians to reduce their debt burdens in the long term is by changing the amortization period on home loans from 30 years to 25 years, according to BMO. This may have the immediate effect of raising monthly payments, but the savings on interest payments over the life of the loan will more than make up the difference.

Canadians might want to steer away from debt management services as a method for controlling their financial burdens. The Canadian Association of Credit Counseling Services has drawn attention to the possibly dubious practices employed by some of these companies. Many of the services these agencies provide have already been outlawed in the United States and at least two Canadian provinces.

"At issue are services that promise savings of up to 90 percent on unsecured … debt of $10,000 or more," explains the CACCS. "This translates to paying creditors as little as 10 cents per dollar owed, a preposterous expectation in most consumer debt cases, according to many experts in the field."

In the midst of Financial Literacy Month, a new survey from the Financial Consumer Agency of Canada showed the vast majority of Canucks don't fully understand their responsibilities when it comes to banking and finance.

For the survey, FCAC asked more than 2,000 Canadians true or false questions regarding banking rights and responsibilities, credit reports and account responsibility, according to Postmedia News. Just 4 percent were able to answer all the questions correctly – 95 percent, meanwhile, were able to correctly answer only half the questions.

Compared with a similar survey from 2006, Canadians' financial knowledge has actually gone down in some areas, according to FCAC Commissioner Ursula Menke. This year's survey indicated just 62 percent of respondents were aware of how to argue a charge on a credit card. Some of the other topics of inquiry included interest on cash transfers from credit cards, opening a bank account after declaring bankruptcy and information related to mortgage rates and lines of credit. Continue reading »

The Bank of Canada is expected to announce its new target interest rate April 17, and many economists predict BoC governor Mark Carney will keep rates low.

The nation's key lending rate has remained at 1 percent for the last 19 months, largely as a way to spur economic activity and prevent Canada from sliding into a recession with much of the rest of the world. Bank of Canada's plan to keep the rate near historic lows – and on track with the American Federal Reserve rate – may have worked too well, as Canadians took the opportunity to pile on debt at a lower-than-usual cost.

Carney expressed concerns in recent weeks over the growing level of debt. But while raising the target lending rate could help curb consumer borrowing, many believe Carney to be unwilling to make any move that might threaten the stability of the Canadian economy. One possible outcome of a hike in interest rates would be a "shock to house prices or higher rates that would reduce household assets and increase financing charges," according to The Canadian Press. This would have the effect of reducing the average Canadian's amount of disposable income, without which consumers would cut back on day to day purchases that drive the economy. Continue reading »

It's a saying as old as time: What goes up must come down. Economically speaking, that axiom proved true in countries around the world where household debt and housing prices soared to great heights before crashing down in a wave of financial ruin. Lest Canadians think themselves immune from the trend, a new report from the International Monetary Fund suggests that conditions may be just right for disaster.

In "Dealing With Household Debt," published in the April edition of the World Economic Outlook, the IMF looks at financial collapses throughout history and around the world to discover what factors preceded them, caused them and kept them going for as long as they lasted. In every instance cited in the report, skyrocketing levels of personal debt and housing prices were directly associated with the relative length and depth of an economic downturn. From the United States in the 1930s to Scandinavia in the 1990s to Iceland, Ireland, Greece, Spain, the United States and the United Kingdom today, the basic factors have been essentially the same.

"When house prices fell at the advent of the global financial crisis, many households saw their wealth shrink relative to their debt," according to the IMF. "Combined with less income and more unemployment, that meant it was harder for many people to make their mortgage payments, and defaults and foreclosures became endemic in some countries." Continue reading »

As debt levels hover near 150 percent of income, many Canadians report feeling comfortable with their current financial situation.

In a new survey from PricewaterhouseCoopers, two-thirds of respondents say their debt level is just about right. An even larger majority – 80 percent – say their job situation is stable. With steady jobs and comfortable levels of debt, it would appear most Canadians find themselves in an enviable position. Still, it could be better.

"Not withstanding their comfort level with their debt levels, Canadian consumers have indicated that they still intend to reduce their debt over the next year; almost two-thirds of those surveyed want to decrease the amount of debt they carry," according to the report. "Interestingly, the intent to reduce debt was present regardless of whether or not they were comfortable with their debt." Continue reading »

Canadian consumer debt has shot up to unprecedented levels in recent years. Average Canadians racked up debts 150 percent greater than their income on credit cards, auto and home loans and other lines of credit while national consumer debt levels climbed to $1.6 trillion in the last quarter of 2011, according to a Reuters report. But financial experts and regulators say it's not time to panic – yet.

Personal debt is a growing concern across the country and raises questions about the sustainability of household finances, according to James MacGee, author of a new C. D. Howe Institute report that looks at Canadian debt. There are several trends that leave Canadians open to an American-style recession, and they merit a careful look, he says.

"While the recent U.S. experience highlights the risks of overextended consumers, more prudent lending standards in Canada suggest that, under likely scenarios, consumer debt levels should remain manageable," according to MacGee's report. "Nonetheless, these high levels of debt leave Canadian consumers vulnerable to large economic shocks – notably a sharp rise in interest rates or an economic downturn." Continue reading »

Despite recent changes to Canada's Old Age Security benefits, most Canadians say their retirement plans will remain the same, a new survey shows.

The recent federal budget from Ottawa included a hike in the minimum age at which Canadians can receive their OAS pension, effectively raising the retirement age from 65 to 67. While a great many Canadians – roughly one third, according to a BMO Financial Group estimate – say they will rely solely on OAS and other similar pension programs during old age, even more say they had already planned to work well past 65.

The Canadian Imperial Bank of Commerce recently polled more than 1,000 adults between the ages of 45-54 to discover their views on the retirement changes, since that group will be the first affected by the new rules. Roughly two thirds say they plan to take on a part time job – 43 percent – or engage in occasional business consulting – 22 percent – to earn money after leaving the full-time work force. Continue reading »

Financial experts and government ministers have been going back and forth in recent weeks over whether to slow Canada's booming housing market, and what the best approach might be to reign in debt.

One of the biggest proposed changes to the housing market, championed by Toronto-Dominion Bank's chief economist Craig Alexander, has been stricter guidelines for mortgage borrowing. Alexander and others want Ottawa to further raise the minimum required down payment from 5 to 7 percent, lower the maximum amortization from 30 to 25 years and impose means testing on would-be homebuyers to ensure they can afford their mortgages. 

A new survey, however, suggests that many first-time homebuyers are already in good financial shape, and that they are the ones driving the current housing boom. Roughly 43 percent of Canadians who purchased a home in the last two years, or who intend to purchase a home in the next two years, say their finances are doing well, according to the joint Genworth Canada, Canadian Association of Credit Counselling Services survey.

Not only that, but nearly two-thirds say they enjoy planning their financial futures. And when it comes to saving for a down payment, 59 percent of Canadians reported it took just two years to accrue the money they needed. Nearly all of those surveyed – 94 percent – said owning a home would be worth the effort, and would provide a greater sense of emotional well-being and security. Continue reading »

With the announcement of a new budget in Ottawa came the news that Canadians' retirement age would be going up, changing the way seniors across the country plan for the future.

The minimum age at which Canadians can receive Old Age Security from the government is set to rise from 65 to 67 over the next decade under new budget rules. A recent poll commissioned by BMO Retirement Institute finds nearly one third of Canadians currently aged 25 to 54 will rely solely on OAS and other public pension plans for their retirement income.

With maximum OAS benefits totaling roughly $6,500 per year, the benefit is likely not enough for most Canadians to live on, even when coupled with the Canadian Pension Plan or Quebec Pension Plan, each of which pays out a similar amount per year in retirement or survivor benefits. With that in mind, BMO offered some tips for Canadians to help with retirement planning. Continue reading »

As many big banks across Canada prepare to raise their mortgage rates, a new survey indicates 43 percent of the country isn't sure if they'll be able to afford higher interest on their home loans.

The report from BMO Bank of Montreal finds 20 percent of Canadians would have difficulty making their mortgage payments if interest rates rise by 2 percent. An additional 23 percent said they weren't sure whether a rise would affect them. Some mortgage experts are concerned that homeowners may not be budgeting enough to cope with inevitable increases, according to a Canadian Press report.

The timing of the study is quite appropriate. Canadians were polled in late February, before most banks began offering some of the best mortgage rates on four- and five-year products in recent memory. The results of the survey were released as those fixed-rate deals ended and some banks signaled a 2.5 percent rise in variable-rate products, hiking them up to 5.44 percent. Continue reading »