The latest financial news to hit the wire over the weekend was a report that stated that Canadians now owe $1.65 for every dollar earned. Most of the debt was due to the rise in mortgage loans that Canadians took out as houses continued to hit record highs in the popular cities of Toronto and Vancouver.
Despite the popular notion that foreign interests are buying up all the real estate in Canada, that still doesn’t hold true, as new first time buyers and people moving up continue to bid up the price of homes. That’s why our average debt has gone up because mortgage debt has risen.
There are many people that believe mortgage debt is not bad debt, so that it shouldn’t be included in the debt statistics. Comments you can find online vary wildly.
“You can have debt on a depreciating asset (a shinny new car) or you can have a mortgage that is largely protected by the asset that does not decrease in value. At a loan to value ratio of 75%, you could tolerate a 25% correction in real estate values and still be above water on your debt” – CBC reader comment
“If you have a $300,000 mortgage and pay $1300/month for it. You may have a debt to income of 300% or as much as 500% if you are using after-tax income! But, if you rent an apartment for $1300/month and therefore have 0 debt/income, you are somehow in better financial shape?” – CBC reader comment
Now it’s not to say that having a gigantic mortgage is a bad thing, but for many it might equate to their entire life savings when all is said and done. Take a look at the posting below:
So in a neighbourhood where average households make $83 000 a year, the home prices are going for $1.25M. In the average scenario, we would have two 30 something year olds earning $41,500 each and taking in roughly $70,000 a year in after tax income. With a low interest rate environment that we enjoy now, the couple might be expected to pay about $1.5M for the home after all is said and done after 25 years. You can see why after 25 years of working the only savings the couple would have is a house.
A mortgage is that. Forced savings. It allows you to save for the future because you aren’t spending your money now, but can you retire with just the house? Probably not.
Canadian Pension Plan payments are very measly for low income earners and it would be hard pressed to even exceed $1K per person per month. That probably wouldn’t even cover the ever inflating property taxes!
Remember that you would still need to spend money now in order to enjoy a good standard of living. Paying and owning a home shouldn’t be someone’s goal in life. There’s just too much to do in this crazy world.
Slave To The Bank
Many people would point out that a house bought at $1.25M might turn out to be over $2M when all is said and done. That’s great, but a house doesn’t put food on the table, nor does it pay for vacations around the world.
You could do a reverse mortgage and collect money through the equity gained on the home. That’s great, but after working so many years to slave away and pay for your dream home, why would you want to pay the bank once again just to take your money back. Do you want to be a slave to your bank for life?
We can’t blame the banks for coming up with new marketing techniques to take our money because we are the ones that decide to become slaves to them. No one forces us to agree to the terms of the banks but ourselves. Over-leveraging and trying to reach for something that is unobtainable is better left for those that can afford it.
Selling and downsizing to a smaller home is also an option, but it can’t be an option for everyone. Remember that the reason why houses are so expensive is through the law of supply and demand. If everyone decides to sell at retirement, then there won’t be enough demand to buy all the houses at such high prices.
Buying a home is not a bad idea. We all need shelter and it’s one of the necessities of life. However, one has to remember that having just a home to live on isn’t enough to sustain retirement. You need to plan carefully and ensure that you’ll have enough cash flow for all those necessities that you’ll eventually need in retirement.
In order to plan for a future retirement, always remember to diversify. That means it’s important to find a good balance between the cost of a home and having a diversified investment portfolio that can generate cash flow.
If it seems absurd that you’ll be paying so much for a home, then perhaps something smaller is better. Consider living in a condo, move to a different city, or if you must, rent a place and save the difference. Remember that a lot of the payments of a house at the beginning is just interest. Save up for a larger down payment and it might actually be better for you.