Toronto ON – Once again, the Bank of Canada is warning Canadians about the pitfalls of using their homes as collateral to borrow money. “People have to be wise in how they look at things. Interest rates are going to go up. So people need to be sure that they can afford higher mortgage interest, for example,” said Finance Minister Jim Flaherty.
Housing prices are bound to peak and start falling, and interest rates will start to climb. It’s at that point Canadians will be at risk of losing their homes because they can no longer afford to make their payments.
“Canadians need to hear and act upon the Bank of Canada’s warning about reducing household debt,” says Jeffrey Schwartz, executive director, Consolidated Credit Counseling Services of Canada, Inc. “This is the time for Canadians to implement debt reduction strategies or seek help, before it’s too late.”
The first step in any smart debt reduction plan should be to create a budget that frees up as much money as possible to put towards paying off debt.
“Find places in your expenses where you can cut back, such as committing to eat more at home to lower your food costs or exercise on your own to avoid the cost of your gym membership,” continues Schwartz.
Once you have a good budget in place, the next step is to choose the strategy you want to use to pay off your debts. In general, you want to choose one of two techniques:
- The High Interest Technique. In this strategy, you pay off your highest interest rate debts first, because these debts build up faster with interest added. Pay all your minimum monthly payments on all your other debts then put all your extra money to paying off your highest interest rate debt first. Once it’s paid off, move to the next highest interest rate credit card, and so on, until you have all your debts paid.
- The Snowball Technique. This strategy starts with your smallest debts and works up to your largest debts, building momentum like a snowball rolling down a hill. Pay all of your minimums and put your extra money to your smallest debt. This frees up more money to put towards your next smallest debt, and so on, until you have all your debts paid off.