The BMO Wealth Institute brought out its September report yesterday. It emphasized the need for Canadians to focus on eliminating the bad and ugly debt accumulated to maintain a standard of living unsupported by earnings.
"The ultimate goal of most Canadians should be the elimination of debt, but the first step needs to be getting rid of bad debt which has the potential to destabilize a household's financial situation," said Chris Buttigieg, Senior Manager, Wealth Planning Strategy, BMO Financial Group. "A financial professional can help you avoid having your debt lead to long-term financial instability and work with you to develop a plan to sort out your balance sheet as quickly and efficiently as possible."
The typical Canadian has $1.63 in debt for every after-tax dollar of earnings. Most of this debt’s been accumulated in order to purchase homes whose prices have consistently risen in value in recent years making affordability that much more difficult.
A further result of rising home prices is the increased borrowing by consumers. Many liken home equity lines of credit to giant automated teller machines. Some people are clearly living beyond their means.
Interestingly, the BMO report found that only 20% of those surveyed discussed debt management strategies with financial professionals in the past 12 months. Perhaps that’s why only 16% of those surveyed felt a $500 per month increase in their mortgage payment would make it unaffordable.
Advisors might want to have a debt talk sooner rather than later because once interest rates go up the conversation’s likely going to be a whole lot messier.
“Generally I dislike debt… but mortgage debt isn’t the worst thing in the world. [However] All debt outside mortgages should be paid off right away,” Hollis Wealth advisor Brent Vandermeer told WP. “I’m more a proponent of using low interest rates to pay off debt rather than those who say ‘it is low so use more of it to grow other assets’. When rates rise, they’ll wish they had paid it off when it was easier to do so.