Rising home costs are making it difficult for some homeowners to pay their monthly bills.
A survey* by Manulife Financial finds 37 per cent of Canadians admit to being short money at least once in the past year. Even more alarming, according to that same survey, four per cent say they are struggling to pay their bills every single month. Add to that, the Bank of Canada is again trumpeting fears of an overheated housing market in cities like Toronto and Vancouver. With housing costs rising, here is how to keep your personal finances in order.
Understand the current climate
The survey finds the average Canadians they spoke to are carrying a mortgage of $181,000. That is up from $175,000 reported in fall 2015. In Vancouver that number is $259,000 and Toronto $194,000. These numbers seem reasonable, but take into consideration this includes everyone from first time homebuyers to those who have had a mortgage for the last 20 years. The survey reveals as well that average mortgage debt is rising, as an increasing number of Canadians are willing to borrow as much as it takes to get into their dream home. Homebuyers should adjust their expectations of the house they want to buy and be realistic about what they can afford. Just because your parents bought a detached home in the suburbs when they were your age, doesn’t mean you can do the same today. The housing market has changed dramatically for young people especially.
Be aware of financial insecurity
Being unable to manage day-to-day expenses, creates financial insecurities that can lead to new problems. This includes feeling vulnerable at work and using less adequate child care options so we can go to work, and saving for anything else becomes very difficult. The survey finds 60 per cent lack confidence they’ll have enough savings for retirement.
Keep affordability in check
This is especially true for first time homebuyers. Always make sure you can afford your home for the long term. Make a 5-10-15 year plan of where you want to be and ensure the house you are buying fits that agenda. The survey finds becoming debt-free is among the top financial priorities for Canadian homeowners. If that is your goal, don’t take on a massive mortgage that could be difficult to manage if rates rise. Always calculate your cost two percentage points higher than what the bank is offering you. This does two things. It prepares your budget for higher rates; and, if you make payments based on that higher rate, you are bringing your principal debt down faster, reducing the cost of borrowing.
Keep your eye on rates
Most homeowners are looking ahead to what is happening with mortgage rates, in many cases because a small rise in rates could dramatically affect their budgets. The Bank won’t raise rates until they are completely sure the economy can handle it. Right now they are expecting the GDP shrink in the second quarter, but it will start to pick up again starting in July at the beginning of Q3. The lower price of oil has not helped and the wildfires in Alberta have made things worse. All of this is keeping rates low, making borrowing easy and cheap and the expectation is housing costs will continue to rise. This survey is a real eye-opener and shows how we are unable to meet all our financial goals. The report states, “Rising housing costs are making it difficult for homeowners to balance paying down their mortgage, saving for retirement and managing day-to-day expenses.” This is a major concern.
* The poll surveyed 2,373 Canadian homeowners in all provinces between ages 20 to 59 with household income of $50,000 or more. The survey was conducted online by Environics Research between Feb. 3 and Feb. 20, 2016. National results were weighted by province, income and age.
RUBINA AHMED-HAQ is the Finance Editor for HPG. You can read her musings in Condo Life and Active Life. She’s also the Family Finance Advisor for PC Financial. She regularly contributes on TV and radio including CBC Radio, CBC News Network and Global News Toronto. Follow her @alwaysavemoney