Debt and more debt

BY FAZAAD BACCHUS

Debt is sometimes necessary; however, the types of debt we get into can be sometimes detrimental to building wealth. There are debts which reduce our overall net worth and there are those debts that increase our net worth. Lest take a look at a few.

Mortgage debt: This is about the largest debt most people will have during their lifetime. Almost everyone needs a home to live in and it’s typically a difficult thing to be able to buy it on a cash basis, so it’s off to the bank to borrow. This is not a bad debt. It may not be an investment, but it’s not a bad debt. As long as you can afford the monthly payments comfortably, you will have a place to live and hopefully the property appreciates in value thereby increasing your net worth.

According to Equifax mortgage debts have gone up 5.2% in 2019. There is still the stress test, but it seems like people have adjusted to it. According to the statistics, house prices have gone up approximately 10% during 2019 and that means it’s more costly, but borrowing costs has just been reduced, making the loans more affordable, but still on an overpriced home.

Consumer loans: Ranging from credit card to buying on credit has had a decrease. This figure also includes request for a line of credit. This is very good to see in that credit for purchases on depreciating items is reducing. However, in great contrast to this is the fact that consumer proposals have been on the rise during 2019.

This signifies that while people are borrowing less for consumer loans, those who have outstanding loans are finding it difficult to repay. Delinquency rates for nonmortgage loans are at almost 11%. Consumer proposals are not the only thing; mortgage loans are also defaulting higher and have been the highest since 2016.

Circumstances: Sometimes we don’t have a choice. If you look around, you will notice a lot of uncertainty in Canada and the rest of the world at the moment. Falling oil prices in Alberta from 2015 have had the population there scrambling to feed their families let alone pay mortgages. They have seen a reduction in overall spending by businesses and government alike. Now on March 7^th, they were further hit with a 25% reduction in oil and related commodities and it’s costing the government more to produce one barrel of oil than they can sell it for.

These are not easy times. Add Coronavirus to the equation and we have a double disaster. There is now uncertainty on production, looming business closures and loss of wages. If you do not have savings, this might be a period where you might have to borrow or refinance your home to take care of your family.

Wise choices: These next few months will be a telling few, the borrowing and spending you do must be necessary and useful. We will get through this, stay strong.