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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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Ontario’s new automated speed enforcement explained

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(NC) To wage the war against speeding, many municipalities across Ontario have turned to automated speed enforcement. Most recently introduced in Toronto, speed cameras are a high-tech solution to reduce speeding and are considered one of the most effective ways to create safer roads and save lives.  

Recognizing police officers cannot catch all speeders, these cameras fill the gap, providing monitoring in specific locations around the clock. When a car’s speed is even one kilometre over the posted amount, it will take a picture of the offending vehicle’s license plate, using the captured photo as indisputable evidence. A ticket is then served to the vehicle’s owner, regardless of who was driving. 

With a focus on high-risk areas, Ontario’s automated speed enforcement cameras are located in two specific municipal areas: school and community safety zones. School zones are designated streets close to a school, featuring reduced speed limits as dictated by local bylaws. Community safety zones are high-risk corridors and intersections, subject to increased fines and penalties.  

While the Ontario Highway Traffic Act outlines the use of automated speed enforcement, municipalities can decide when and where to use cameras to curb speeding. The act does dictate financial penalties for speed violations captured with cameras, which vary depending on the number of kilometres caught over the speed limit.  

Speed enforcement is not new, but part of a broader, integrated road safety strategy that includes infrastructure improvements, awareness campaigns and new uses of technology. City officials hope for a halo effect, inspiring better driving behaviour across entire communities, not only in areas with cameras. A controversial topic, some critics take exception to speed cameras, labelling them as sneaky cash grabs for municipalities. Governments think the opposite. 

Safety advocate and auto insurance provider Onlia is hopeful that the cameras will provide drivers with a reminder to slow down, especially in high-risk areas like school and community safety zones.  

For those who obey the speed limit, automated speed enforcement shouldn’t change anything about your driving style, says Alex Kelly, Safety Ambassador at OnliaDrivers have fair warning as they approach areas with speed cameras, as mandatory signs provide reasonable notice of upcoming automated speed enforcement. Regardless of warnings, the best speed is the posted speed. 

You can start to understand your speeding style by downloading the insurance provider’s new safe driving app that coaches and rewards for you for safe driving habits.

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Online banking: How to protect yourself from fraud

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(NC) Since the start of the COVID-19 crisis, a growing number of consumers are regularly using mobile and online banking to paybill payments, transfer money and make purchases.

Although these tools can give you easy access to your personal finances on demand, there are also some risks involved. For instance, your banking information—such as your debit or credit card number, user name, or personal identification number (PIN)—could be stolen. If criminals have access to your online banking information, they can steal your money, which is why it’s so important to be  vigilant when you bank online.

Follow these tips to help protect your personal and banking information:

  • For your online bank accounts, use a strong password that can’t be easily guessed, and never share your user name or password with anyone.
  • Check your accounts regularly to make sure there are no transactions you didn’t make or authorize.
  • When making online purchases, never authorize a website to save your credit card information, password or other personal information. Giving websites this permission will save you some time the next time you access the site, but it poses a real threat if a hacker manages to access your information.

Most financial institutions have policies to protect you from transactions that you didn’t make.

However, you are responsible for protecting your online and mobile banking information. If you give your details to anyone—including your spouse or partner, a family member or a friend—your financial institution may hold you responsible for any unauthorized transactions in your account, and even strip you of protection from unauthorized transactions in the future.

If you suspect your information may have been compromised, change your passwords immediately, and check your account and credit card statements for anomalies and report any suspicious transactions to your financial institution.

The Financial Consumer Agency of Canada has created resources to help you protect your online banking information.

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Payday loans: Not the best way to borrow money

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(NC) Payday loans are a very expensive way to borrow money. Even if you’re struggling financially, think twice—and crunch the numbers—before getting this type of loan.

Depending on the rules in your province, payday lenders can charge fees of $15 to $25 per $100 that you borrow.

As an example, let’s say you borrow $300 for home repairs. The payday lender charges you $51 in fees, or $17 for every $100 borrowed. Your loan balance is therefore $351, which amounts to an interest rate of 442 per cent.

There can be serious consequences if you don’t repay your loan by the due date. These may include the following:

  • The payday lender may charge you a fee if there isn’t enough money in your account.
  • Your financial institution may also charge you a fee if there isn’t enough money in your account.
  • The total amount that you owe, including the fees, continues to increase.

There are better options out there

Payday loans should be your last resort to borrow money. Consider cheaper ways of borrowing money, such as:

  • Cashing in vacation days or asking for a pay advance from your employer.
  • Getting a line of credit, a cash advance on a credit card or a personal loan from your financial institution.
  • Getting a loan from family or friends.

Before getting a payday loan and to avoid getting stuck in a debt trap, consider other, less expensive ways to borrow money.

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