Pickering / Ajax Real Estate Blog

Paul Brent – Moneyville

When it comes to borrowing, the statistics don’t lie. Canadians are finding more and more ways to rack up debt.

Every year, household debt hits new records, with the average family now sitting on (or under) $100,000 worth of debt, according to figures compiled by the Vanier Institute of the Family.

The Ottawa-based research institute blames rising home prices, new ways to borrow from financial institutions and our consumerist society in general.

It all begs the question, is there such a thing as smart borrowing — and are we getting any better at using credit? The answer, it seems, depends on who you ask.

“Borrowing makes sense when you are using the funds to improve your financial situation,” says Frank Wiginton, a certified financial planner with TriDelta Financial in Toronto.

His rather short list of “good” borrowing includes buying a home instead of paying rent, investing in rental property that generates income, furthering an education, buying stocks that pay dividends and hopefully appreciate, and, for the more sophisticated, borrowing to buy an asset that will produce income that can create a tax deduction on the interest you pay.

Wiginton’s dumb borrowing list contains most of the no-nos that financial planners see from clients with plenty of debt and little to show for it: fancy cars, vacations, dining out and “consumer goods” — a category that includes furniture or electronic gadgets such as iPads, cellphones, computers and televisions.

“Borrowing to purchase a depreciating asset is only compounding the loss,” he explains.

Even “good” debt — the kind that B.C. money blogger Kerry Taylor piled up to get her degree ($17,000 versus the Canadian average of $19,000) — can be a burden, especially for someone just starting out in the workforce.

Taylor, who blogs full-time at Squawkfox.com about finances and debt-free living, paid her loan off in six months by continuing to live like a starving student and utilizing government tax credits.

“The debt was a terrible burden for me, so I vowed to never need (to borrow) money again,” she says, adding that borrowing to get a post-secondary education comes with a caveat. “Racking up massive student debt to enter into a low-paying career is a huge mistake.”

Low-cost borrowing has proven popular in recent years. Homeowners can tap into low-interest home equity lines and, for those facing credit card debt or other high-interest loans, there is the allure of consolidation loans that bundle everything up into a neat, more affordable package.

Although lower-cost loans should be a no-brainer, financial experts warn that, in many cases, they do little to fix the underlying behavior that created the debt trouble in the first place.

Consolidation loans are great for dramatically reducing the interest and payments on debts, says Wiginton. But they should only be used if you have changed your ways and have control of your cash flow.

“Otherwise, people can easily and quickly build up even more debt, and end up running into bankruptcy through ‘debt pyramiding.’ ”

Borrowing to get off the debt treadmill, not to keep it running, qualifies as smart borrowing.

Elena Jara, education co-ordinator with Credit Canada, a Toronto-based non-profit credit counselling agency, adds starting a business to the list of smart borrowing.

In most cases, borrowing smart also means short-term. “Can you really afford to pay this back in a very short time,” she says. “You don’t want the 60- or 70- or 80-month term. To borrow smart means you are utilizing the money for your advantage. So you are not going to pay too much interest, you are not going to pay it for too long and you are going to acquire some equity or value for what you have borrowed.”

Jara strongly suggests shopping around when you are looking for a loan or mortgage.

“The problem with a lot of people is they are so afraid of looking around,” she says. “It is okay and it is really smart to negotiate the best interest rate for yourself. You shouldn’t be shy about it and be afraid to ask.”

That “shop around” advice comes with a warning. Don’t allow a bunch of financial institutions to check your credit rating, since a series of inquiries can lower a credit score.

“You are shopping around, you are not providing information,” she says. “Most people are not aware of how applying for anything (several) times can affect their credit score.”

Typically, the single-biggest loan for Canadians is their mortgage. First-time homebuyers are often shocked, and perhaps pleasantly surprised, when they are told how much they can borrow for a home.

But mortgage shoppers should always consider the worst-case scenario, advises Nicole Wells, head of consumer lending for ING Direct.

“They need to think beyond today. What happens if rates rise or what happens if your spouse loses their job? Can you afford your debt on one income?”

Wells speaks from personal experience: When she relocated from ING’s European home base back to Canada in the middle of a recession, she had just had a baby and it took her husband nearly a year to find a job.

“I really had to budget and make sure that I could afford everything that we could on one salary. It teaches you a lot when you have to do that.”

————————————————————————————————————–

Contact the Jeffrey Team for more information  -  416-388-1960

————————————————————————————————————–