Good Debt or Bad Debt? No Debt is Better!

Mortgages are fueling the spike in household debt

bad debtRecent data from Statistics Canada shows that household debt continues to rise (nearly 5 percent, year-over-year). Most of this increase comes from mortgage debt. Non-mortgage debt, while rising, is doing so at a more moderate pace.

This is not altogether surprising; a surprise rate cut from the Bank of Canada earlier this year has Canadians able to “afford” more mortgage debt. The hot conditions in some housing markets in Canada are requiring homeowners to leverage themselves heavily, just for the privilege of owning a house.  As we’ve touched on before, when rates go back up, homeowners may find themselves stretched dangerously thin.

For many, the goal is to climb the property ladder, which gets shakier with the amount of debt put upon it. What if you shifted your property goals to include being mortgage-free faster – or at least reducing the amount you owe?

Rather than taking on more ‘house’ and more debt, be proactive in reducing your mortgage debt today,” says Jeff Schwartz, executive director at the Credit Counseling Services of Canada. “While it might be tempting to borrow as much as you can to buy the house you want today, getting your financial house in order must come first.”

Why pay down your mortgage?

It’s not just about wiping out that debt; the faster you pay off your mortgage means less money shelled out in interest over the years. Less money paid out towards interest means more money in your pocket, plain and simple.

You’ll have more cash flow, as well as more equity- which will give you many more options, should you choose to move up the property ladder.

Payment schedule

Do you get paid every two weeks? Making your mortgage payments biweekly or weekly will reduce your amortization and lead you into mortgage-free territory faster.

With this payment schedule, you’ll automatically make extra payments every year. This reduces the amount of interest you owe as well.  Try Consolidated Credit’s debt restructuring calculator if you don’t believe me!

Match-a-payment

Many lenders give you the option to match payments (at least once, but sometimes more often) without penalty. This allows you to double your payments and it’s a great way to chisel away at that debt.

Reduce your Amortization

Depending on your debt-to-income ratio, you might be able to shorten the amortization of your mortgage. This means you’ll pay more every month, reducing both the principal and interest that you owe.

Be careful with this one though. You don’t want to back yourself into a financial corner by being on the hook every month for a big chunk of your income. You still need wiggle room.

Lump sum payments

Lenders often allow you to make a lump sum payment every year without penalty (often on the anniversary of your mortgage).

No extra cash? Plan for it during the year, with tax returns, bonuses from work or any extra windfall you may come across. Reducing your mortgage is a great way to use these extras!

 

Are you working towards home ownership, or are looking at ways to reduce your overall debt load? There are steps you can take today to help get you moving towards your goals. Call one of our trained credit counsellors at or check out our free online debt analysis tool to get started.

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