A recent Bank of Montreal report carried disturbing information about Canadians’ debt levels. It stated that a small interest rate rise would shock 72% of homeowners. Essentially, 72% of the people surveyed can’t afford their homes.
Canadians’ household debt levels just keep going up. The federal finance minister and governor of Bank of Canada continue to plead with Canadians to stop accumulating debt. The reverse is happening. The latest Statistics Canada’s revision to 2011 household debt as a percentage of disposable income from 150.6% to 161.7% is just as troubling. Indeed, the current debt level of 163% of disposable income is around America’s pre-crash level. When our crash comes, as it must, Canadians can blame themselves alone.
I believe one money myth is a significant household debt driver. Many folks believe if their rent is less than a potential mortgage they can afford to buy a home; their friendly banker facilitates this myth. These folks ignore the full cost of home ownership and forget interest rates are at historical lows.
While government has been warning Canadians to stop gathering debt, it has the solution; it can increase interest rates. To its credit, gradually, government has been tightening conditions for insured mortgages. And affected potential homeowners need to grow up and stop irresponsible borrowing. They know they can’t afford their homes, but greed, pride, and impatience propel them to irrational spending.
Nevertheless, it seems the government wants to eat its cake and still have it. Government knows an interest rate hike will slow the already sluggish economy, so it hesitates. Inaction is myopic because personal debt levels are unsustainable. Which is worse? Wait until everything crumbles, or start creeping rates to cut consumer appetite to take on more unaffordable debt? I vote for the latter, even though it is too late to dent the problem significantly.
What can you do today if you are amongst the 72% with a seemingly unaffordable mortgage? First, start a spending fast. Next, develop a sacrificial budget. If the sacrificial budget shows you’re unable to function at this adjusted lifestyle with your current mortgage, look at different housing alternatives including selling your home.
It’s important to understand that it’s acceptable to sell your home and rent, probably a more modest home. One reason you would wish to sell your house is the market is likely to be better today than later when more people in your situation might be forced to sell at the same time. Besides, generally, in our bubble conditions today, your options and timing might be better.
Finally, if you’re a Christian seek God’s direction before acting. You might find these five biblical stewardship verses helpful in your reflections with God.
Copyright © 2012, Michel A. Bell