Tag Archives: interest rates

The Real Cost Of Personal Debt

MarieEngen
Marie Engen, Boomer & Echo

By Marie Engen, Boomer & Echo

Special to the Financial Independence Hub

We are constantly reminded about the rising level of outstanding personal debt carried by Canadians. Every few months we hear about the perils of rising interest rates that may leave many in financial difficulty.

The reality is – debt is not all bad. Most of us wouldn’t have been able to purchase our homes without a mortgage, or buy a car, or pursue secondary education. Even credit cards are not evil in and of themselves no matter how they are often portrayed.

To never (ever) borrow money is to live in the land of the already rich, or to always be a renter. At the other extreme, using other people’s money to fully finance your lifestyle is ridiculous and precarious.

Most of us don’t fall into these extreme circumstances. We hold a reasonable amount of debt, make our payments on time and have good, to very good, credit ratings. That being said, most people fail to optimize their overall debt management strategies to pay the least amount of interest.

Consolidating debts

We no longer hear about the “all-in-one” mortgages offered by financial institutions such as the Manulife ONE and National Bank All-in-One. These accounts combine chequing, savings, and borrowing into one account. If used properly, consumers could simplify their debt and lower their overall interest paid.

These won’t work for most people because they like to keep all their accounts separate. They have multiple liabilities at different interest rates:

  • Home mortgage
  • Car loan
  • Line of Credit
  • Student loan
  • Credit card to use for discounts at your favourite store
  • Credit card for other rewards.

When I worked in banking, I gave out many consolidation loans. I confiscated and cut up credit cards, cancelled overdraft protection, and closed out other loans and lines of credit. Invariably, within a couple of months, more than half of these clients would reapply for their credit cards, reinstate ODP, and sneak off to a different branch to get another line of credit.

More personal debt mismanagement

Here are some other ways people don’t think clearly about managing their personal debt.

  • Mike and Molly are determined to pay off their mortgage (2.7%) in less than 10 years. They put every available dollar towards the principal. They also have two car loans at 4.5% and 8% and purchased a “don’t-pay-for-six-months” entertainment system. It makes more sense to address these debts first.
  • When their mortgage came up for renewal, Fred and Ethel rolled the balance into a new Home Equity Line of Credit. However, they continue to finance their lavish life style with their credit cards. They pay off the cards each month from the HELOC on which they make the required minimum payment of accrued interest. After all, they have a huge balance still available to them. They think they are managing their debt well by paying off “bad” credit card debt and having “good” mortgage debt.
  • Jess went to her favourite home décor store to purchase some sheets. There was a store promotion that gave 20% off purchases when opening a new store credit card. Excited by the discount, Jess picked out a whole bedding set from duvet to accent cushions. The balance is too high to pay when the bill arrives so she makes minimum monthly payments while incurring interest charges of 29.9%. Meanwhile, she has enough money in her low-interest savings account to pay the entire bill, but chooses not to.
  • Leonard works on commission and his paycheque amounts vary. He makes up the difference in lean months with his overdraft protection at 24%. Until he learns how to budget for his irregular income, he should use his credit card for purchases, even if he carries a balance for a month or two.
  • Ross receives a credit card offer with a “teaser” 0% interest on balance transfers. He transfers the balance from his high interest rate card and cancels it. He uses his new card for future purchases, not realizing that the 0% only applies to the amount of the transfer. His payments go to the new purchases he made which carry a much higher rate. He would have been better off to continue using his old card for his occasional new purchases, pay the monthly balance in full, and avoid using the new card at all.
  • Barney and Betty have a systematic plan to pay off all their debt. They are using the “snowball” method popularized by author Dave Ramsey, which states that it is psychologically satisfying to first rid yourself of the smallest debts first, regardless of interest rates. The reasoning is they would be better prepared – and more enthusiastic – to stick with the strategy. But, once the small debts were done they took their foot off the gas and paid random amounts on the higher debts whenever the inclination hit them.  

Final thoughts

Instead of speculating about the direction of future interest rates, we should be examining our own habits.

Take a look at how you think about – and manage – your personal debt and see if you can minimize your borrowing costs.

Also read:

Marie Engen is the “Boomer” half of Boomer & Echo. In addition to being co-author of the website, Marie is a fee-only financial planner based in Kelowna, B.C. This article originally ran at the Boomer & Echo site on Feb. 9, 2016 and is republished here with permission.

 

Q&A with Mawer’s Jim Hall: Deflation and rising interest rates

MAWER_Cameron-Webster-4x6-Formal-blue-bg
Cameron Webster

By Cameron Webster, CFA
Institutional Portfolio Manager, Mawer Investment Management Ltd.

Special to the Financial Independence Hub

At Mawer, we spend a great deal of time asking and answering the question: So What? A company’s share price is down 6% … so what? A central bank moved interest rates up … so what?” Google re-named itself Alphabet … so what?”

It is not always an easy question to answer and often leads us to ask even more questions in an effort to develop key investment insights.

“So what?” is one of the questions that can lead us to investment action (or inaction) in our process of building well-diversified, resilient portfolios. In an effort to pass on our “so what” learnings, I interviewed our Chief Investment Officer, Jim Hall, with specific questions pertaining to his views on risks in the current environment.

Cameron Webster: Jim, Mawer conducts a quarterly risk review, rating macro risks on both probability of occurrence and degree of severity. I see a few with 9/10 on probability but lower severity and a few with the opposite profile, high severity, lower probability. Help us understand the way Mawer is viewing some of the broader risks at the top of the list right now.

MAWER_Jim Hall 4x6 Formal blue bg
Jim Hall

Jim Hall: It is not enough to just look at the rankings. We need to ask ourselves is it something we need to do something about? Is this something upon which we need to act? Is it a biggie? Is it important? That’s the value in evaluating these risks on both probability of occurrence and severity of consequence.

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Renewing your Mortgage this year?

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

Our mortgage is up for renewal later this year. That’s a shame because I’m enjoying the ultra-low 1.90 per cent interest rate on our five-year variable mortgage (prime minus 0.80 pe rcent). It’s a near certainty that I’ll have to renew at a higher rate this summer.

My bank is offering five-year variable rates at prime minus 0.10 per cent, which means a mortgage rate of 2.60 per cent. That’s not much of a discount off of the five-year fixed rate they’re advertising, which comes in at 2.94 per cent.

Five years ago, when the deeply discounted variable rate was 1.50 per cent lower than the five-year fixed, it was a no-brainer to go variable. Now it’s not so cut-and-dried.

What is clear is that we’re living in the golden age of low mortgage rates. Remember three years ago when BMO introduced its controversial 2.99 per cent ‘no frills’ mortgage?

Now it’s rare to see mortgage rates ABOVE 3 per cent – and most come with all the bells and whistles; from 120-day rate holds and pre-approval, to double-up monthly payments and lump sum payment privileges.

For nearly a decade we heard how interest rates couldn’t possibly get any lower and that the smart thing for homeowners to do was lock in their mortgage with a five or even a 10-year fixed rate.

It turns out the best advice was to do what has almost always saved Canadians the most money over the last 50 or 60 years. Go variable.

Renewing your mortgage

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EQ Bank: Your new High-interest No-fee Banking Solution

eqbankbanner_HISABy Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

Over the last decade or more Canadian banking customers have had to accept two inevitable truths:  interest rates on savings deposits would plummet and stay at historic lows, and banks would continue to raise fees on everyday bank accounts and services. All of this occurred while Canada’s big five banks hauled in record profits.

Savvy bank customers had to invent complicated workarounds to keep their hard-earned money safe, free of fees, and to earn a decent interest rate. That meant limiting transactions, maintaining high minimum balances, and bouncing from bank-to-bank chasing the latest short-term high-interest rate promotional offers.

If only there were a bank that offered one solution: a hybrid chequing-and-savings account that paid market-leading interest rates with no monthly fee, and no extra charges for moving your money around via e-Transfer or for paying bills.

EQ Bank

Enter EQ Bank – a new digital bank and offshoot of Equitable Bank – with its unique EQ Bank Savings Plus Account. Launched on January 18th, 2016 Continue Reading…

Weekly Wrap: MoneySense’s 2016 ETF All-Stars; BMO and Horizons ETF Outlooks for 2016

ETF word on the green enter keyboard image with hi-res rendered artwork that could be used for any graphic design.Lots of ETF developments to report as we close out January. The February/March 2016 issue of MoneySense magazine includes the latest edition of a feature I spearheaded called the ETF All-Stars.

The focus is on low-cost broadly diversified “plain-vanilla” ETFs but we also included several “Satellite” picks, some of them low-volatility products covering Canada, the US, EAFE and Emerging Markets.

Our six panelists strive not to change  the “All-star” lineup too often, since the idea is to minimize turnover and taxes, while having low-cost portfolios that can be bought and held over the proverbial long run. Even so, each year there there are inevitably a few substitutions and replacements and this time around we modestly expanded the number of “All-Stars.”

BMO’s ETF Outlook 2016

Meanwhile on Friday, BMO Global Asset Management released its ETF Outlook 2016. It noted the ETF industry had another record-breaking year in 2015: globally it grew to more than US$2.9 trillion as of December 2015, with a record US$372 billion in new assets the last year.

The Canadian ETF industry also had an historic year, with a record $C16.3 billion in inflows, and assets hitting just under $C90 billion, which is twice as much as five years ago.

Market volatility and ETFs

The report reprises the market volatility of 2015, notable the China-centric selloff of August 24, the surprise non-hike of interest rates by the Fed on Sept. 16th, and its finally raising them by 25 basis points on December 16. And of course there was the continued slide in the price of oil, which hurts resource-based economies like Canada.

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