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| Adrian Mastracci, president
of KCM Wealth Management, says "Borrowers
are well on their way to digging a deep hole
for themselves. Low interest rates lull people
into borrowing more than they otherwise would
and can truly afford." |
By Paul Delean
The Province
Tuesday, August 26, 2003
The Calgary Herald
Sunday, August 24, 2003
The Montreal Gazette
Saturday, August 23, 2003
Debt is a four-letter word that no longer shocks
many Canadians.
And that worries financial planner Adrian
Mastracci.
He's convinced there's a reckoning ahead for
overextended consumers when interest rates, still
near historic lows, eventually begin to rise.
"Borrowers are well on their way to digging
a deep hole for themselves," said Mastracci,
an adviser at KCM Wealth Management
Inc. in Vancouver. "Low interest rates
lull people into borrowing more than they otherwise
would and can truly afford. Somewhere along the
line, we'll have to pay the piper. Most people
are one or two paycheques from financial ruin.
They don't have an emergency fund to fall back
on."
Bank of Canada statistics show consumer credit
on a dramatic rise in Canada, with the outstanding,
non-mortgage debt at Canadian financial-services
providers topping $222 billion in 2002, an increase
of more than 50 per cent from $143 billion in
1998.
Credit-card records kept by the Canadian Bankers
Association shows the number of Visa and MasterCards
held by Canadians hit 49.4 million in 2002, up
from 35.3 million in 1998. Accounts with balances
climbed to 20.8 million from 16 million, and the
average transaction rose to $100.51 from $89.96.
As of May, line-of-credit debt at chartered banks
had almost doubled in three years to $63 billion.
It's not unusual these days to find people simultaneously
juggling car loans, mortgages, RRSP loans, credit-card
bills and lines of credit.
Financial counsellor Emily Reid of Reid &
Associates in Montreal says young people in particular
are "less scared of it (debt) than their
parents' generation. They see it as a cost of
doing business. But what tends to happen, if you
pay only the minimum on a credit card, is that
you continue doing it. It just becomes an unexamined
habit.
If you took a year's worth of Visa statements
and added up the interest, I'm sure a lot of people
would be surprised by how many days' work that
represented."
Reid cautions a mortgage payment that seems affordable
when the interest rate is five per cent can become
a stretch at six or seven per cent.
"Make sure you can still afford it if interest
rates go up a full percentage point."
Car deals also can push consumers to the limit,
even if the vehicles are leased or interest-free.
"If you can't afford to repair it, you really
can't afford a car," she said.
Mastracci said accumulated debt "really
crimps building up a nest egg. It's one of the
biggest impediments I know of. The consumer has
to say, 'How do I get this monkey off my back?'
They need a game plan to repay it. The sooner
they do it, the better off they'll be."
So how can consumers profit from the current
interest-rate climate?
If you're seeking or renewing a loan or mortgage,
shop around. The fact that posted rates are low
doesn't mean they can't go lower if the bank wants
your business.
If you renew a mortgage at a lower rate, consider
maintaining the payment at the actual level, paying
down more of the principal and chopping months
and possibly years off the payment schedule, rather
than simply pocketing the difference.
If you've got debts in a lot of places and at
a lot of different rates, pay off the most expensive
(typically credit-card balances) and nondeductible
ones first. You could also look into consolidating
at a lower overall rate, though Reid notes "that
doesn't give you more money. All it does is buy
you time to learn new behaviour."
If you hold savings bonds or other low-paying
fixed-income products while at the same time carrying
a mortgage or an outstanding balance on credit
cards or a line of credit, consider cashing them
in and paying down all or part of the debt.
If you own investments like stocks and mutual
funds outside an RRSP but also have credit-card
balances or personal loans, you might want to
sell the investments, pay off the debts, then
borrow to repurchase the equities (after waiting
the required 30 days). The loan interest then
becomes tax-deductible.
If one spouse has significant cash reserves and
the other has little income, a spousal loan can
be concluded at the "prescribed rate"
specified by Canada Customs and Revenue Agency
(currently three per cent annually). The loan
can be for as long as the parties choose. The
borrowing spouse is required to pay the interest
annually and the lender must declare it as income,
but the lender's tax obligation is minimal with
the interest rate so low and the borrower gets
to deduct the interest cost if the money is used
for investment purposes.
At the very least, consumers should take a hard
look at the need and total cost of what they're
purchasing with borrowed money.
Buying on credit actually is two transactions
in one, Reid said.
Not only are you committing to the purchase price,
you're "renting somebody else's money at
the same time. You can't afford one thing, so
you're buying two."
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