It has been over 30 years since (the early 80’s out of control inflation) mortgage rates were the highest in history at 20 plus per cent. Monetary policy at the time was to wrestle inflation by increasing interest rates. The idea was to restrict consumption with high interest and tight credit. There was no such thing as a ‘Line of Credit’ back then. Since then the floodgates (cheaper money and easy credit) were opened wide and we went from highest to lowest rates in history. It took almost 20 years for rates to return to single digits. Then the dot.com stock crash in 2000 followed by the September 11, 2001 attack on the World Trade Centre led federal governments around the globe to lower rates faster than before due to avert economic collapse. We were told to consume to help the economy, and expansion was a good thing. The prime rate which dropped to a low of 2 per cent, along with the new ‘line of credit’ product, allowed consumers to access home equity with like never before. This led us to an unprecedented spending frenzy. Lower rates fuelled the housing market to a boil. Prices doubled in less than 12 years. Everyone had equity. Today everyone has debt. The pendulum has swung hard to the other extreme. Everything has changed, with the exception of high interest rate credit cards. The federal government (who caused it all) is now telling us we have too much debt and to pay down our debt at a time when property taxes, provincial and federal income taxes topped up by a 13% HST are at all-time highs. At the same time wages, house prices and the economy flattened. Now experts say rates have been so low for so long that it is extremely difficult to wean us off ‘the cheap-money drug’ without causing an economic collapse. Most people became spending with credit, addicts and addictions are hard to break. Most people cannot save, let alone pay off high interest debt anymore because the feds eliminated the ability to refinance above 80% of value. So there is the ‘trap’. Too many people have lines of credit making interest only or minimum payments and excessive credit card debt exploded. Governments around the world are also trapped with unprecedented debt. In fact many countries are now bankrupt. The majority of us have new cars, new houses, flat screen tv’s, new appliances, fancy computers and mobile devices, and on and on, because we were effectively ‘brainwashed’ into living beyond our means. Are we better off than before? In many ways, ‘Yes’. We are better of with modern conveniences and luxuries than the rich were one hundred years ago. We have flush toilets don’t we? In the biggest way, financially speaking, the answer is an emphatic ‘No’ given the inability to pay off debt together. Way too many people are playing ‘Rob Peter to Pay Paul’. This does not bode well with the prospect of higher interest rates and even higher payments in the future. Interesting to note that the average mortgage payment today is virtually the same as it was in the high interest rate environment some 30 years ago. That’s because house prices and mortgages have almost tripled. Do your children have cell phones and computers and have manicures and pedicures? Time to cut back ya think? As for adult children moving back home? Well we will leave that one for another day. Answers are few, we can only think of two (it would appear) to pay down debt is to ‘Make More Money Honey! Mom & Dad, get part time jobs and put your teenage kids to work too! Put every loonie, quarter, dime, nickel, (forget about pennies, they don’t count any more) towards debt repayment. Secondly put together a budget and find savings to put towards debt. Better yet and since old fashion budgets rarely work, give Ron a call to consider SMART EQUITY cash flow management/debt reduction system. It’s amazing! And it will change your life!
Month: September 2013
CELL PHONES & MORTGAGES, NOW ‘CONNECTED’ Historically credit reports never reported cell phone, rent, and utilities repayment history. Recently a new client of ours came to us after being declined by their bank as they were told that they had unsatisfactory credit. No further explanation was given. This is what the banks do. They leave you in the dark wondering what went wrong. Well, as it turned out John’s cell phone account had been reported on his credit report. It’s a sign of the times folk, where qualification guidelines continue to tighten further. Not only are cell phones now included on credit reports now but lenders are now taking into account (the average payment) into debt service calculations as they view cells as a form of credit. We are all well aware that billing mistakes commonly occur with cell carriers some which can go unnoticed for months at a time. Worse, this new move includes showing cell phone repayment history for the past 7 years. So someone who missed payments many years ago, perhaps for a good, legitimate reason, can be declined for a new mortgage today. Highly unfair we say. Typically monthly payments can be as low as $35. Not much credit is it? The cell used to be the one thing people could dispute when one got unfairly charged and refused to pay. Well we can’t do this anymore or our overall credit will suffer. Parents tell your kids; in fact everyone you know to make sure their cell account is paid on time. Spread the word. Same thing with student loans. They can hurt credit, not just students but parents and family who have co-signed. Co-signing is now more dangerous than ever because while your child may be the one making monthly payments, if they screw up and you are unaware, your credit will suffer as well because you are considered equally responsible for repayment. If one’s credit history is ‘soft’, in other words you have had some issues but are still approvable by some lenders; the cell has become the tipping point. We did manage to get our aforementioned new clients approved with one of our non-bank institutional lenders. This is but one of many examples of instances where the Bank may say ‘NO’, but we say ‘YES’.
We are back fresh from our second home exchange in two years. This summer we travelled to England and Scotland. Last year it was the south of France. What a beautiful country indeed! The people were so friendly, courteous, polite and helpful. We would be remiss not to mention the wacky, hilarious style of humour the Brits have. Our stomachs hurt from a multitude of gut laughs. We had a really LUVELY time. The country side is gorgeous. Because of all the grazing (mainly sheep) the farms are nicely partitioned by old stone walls, and unlike here, they kept much more forestation that we did and so it is so so green. Driving was a big challenge as everything was the exact opposite of Canada. Had to drive on the left side of the road. The controls were on the right side of the car. Most cars are manual shift, which is on the left side of the steering wheel as well. And then there are the ‘Roundabouts’. Well, talk about confusing, and they were everywhere. You always yield entering, and make sure you enter and exit from the right lane. Phew it was harrowing at times. There are also no long straight roads in Britain either. Turns and narrow roads are common, including many single lane roads in more remote areas. Brit drivers are much more patient and courteous than here. We only got honked at twice. Here it would have been dozens. Our guts also hurt from all the deep fried foods. Brit diet includes a lot of meat and of course fish and chips. Because we are vegetarians it was a challenge. Often the healthiest choice on the menu was fish and chips. So we chose that often, but it was the best we’ve ever tasted. On a business note. While in the U.K. our former governor of the Bank of Canada was prominently in the news as new head of the Bank of England. Mark Carney announced a new policy which linked interest rates with unemployment. Very clever we thought. He stated that the prime rate would not be increased until unemployment declines to 7.7 per cent giving people and business alike more certainty about the future in terms of planning ahead. We could certainly use some of that here to counter the plethora of economic forecasts and media ‘spin’ about rates increasing. Back to our story. The Brits are much more into history than Canadians, because they have so much more of it. There were castles and museums galore. Ron attended the British (golf) Open, played St. Andrews and also Castle Stuart where the Scottish Open was played. Scotland was amazing and if you ever go there, go see the Isle of Skye. Words cannot adequately describe. ‘Breathtakingly Beautiful’ comes to mind. They also have a ‘lake’ region that was incredibly beautiful. We also totally lucked out with the weather. It was sunny and warm (had a heat wave too) and had next to no rain the whole time which of course is virtually unheard of over there. Transportation by bus and rail is much more common and so efficient. We loved the United Kingdom, especially its’ people but it is great to be back in our Home Sweet Home, our Canada.