From Indulgence to Constraint

There is a looming danger within our sights. Personal debt is the elephant in the room, and catastrophe will hit when interest rates begin to climb.

A million dollar mortgage costs about $4,200 per month, amortized over 30 years at 2.99% annual interest rate. At a 38% ratio of debt to gross income, a family only has to earn about $112,000 per year (assuming all other expenses fall in line) to afford this home. This would be a good home in Toronto, but not outstanding. Fast forward five years and interest rates are 7%. A one million dollar mortgage amortized over 30 years will cost more than $6,500 per month, which is more than a 50% increase. This family has to pay income taxes, pay utilities, feed and cloth themselves and their 2.5 children, and run at least one car on the balance of available income.

People are not talking about this problem. Couples are not communicating their fears or their reassurances. Is it possible that almost 20% of the population has included lottery winnings into their future financial plans? We have to get real.

If you are under the age of 65, you may have been raised to believe that you are entitled to what you want. This entitlement is disconnected from effort and work ethic. We are not entitled to what we cannot pay for. Soon enough our indulgences will be lost because our income cannot move fast enough to avoid the speeding bullet heading right at us.

There is a solution. You can soften the problem if you start now.

Let me give you a few examples:

  1. Renegotiate your mortgage.
  2. Amortize that mortgage over 20 years not 30 years and if you cannot cover the monthly payment, looking at making financial changes.
  3. Add up all of your consumer debt and pay off higher interest rate credit cards before lower rate cards.  Always make the minimum payment. Do not miss any scheduled payments. Missed payments = lower credit score.
  4. Always, always have access to funds if you are hit by an unexpected setback. That means setting up a line of credit that you will not use unless under extreme circumstances such as illness or extended loss of employment. Lines of credit (LOC) are better negotiated when not needed.

You can embark on this journey on your own, or you can ask for guidance. Let us show you what we can do for you.

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