Reviewing the Real Life Ratio

Lately, I’ve been keeping an eye on the Globe & Mail. I am glad to see more good articles written about house-hold debt. In the past I've written about this topic, buying what’s reasonable versus maximum.

Rob Carrick from the Globe & Mail wrote two excellent pieces on 6 March 2014 and 19 March 2014. In the March 6th piece, entitled “Can you really afford that mortgage? Know your Real Life Ratio”, Rob makes a bold outright statement when he says, "Someone ought to explain the facts of life to the nation’s bankers....Never take a lender’s word for it that you can afford a house." Rob highlights what he calls the real life ratio which accounts for the basic costs of home ownership but also the real world expenses such as education, insurance, and long-term home maintenance. The real life ratio (see attached link, excel sheet) also shifts depending on what stage you are in life including your kids.

In Rob’s second article, entitled “West Coaster making $86,000 can barely afford his modest life,” Rob shares the life of Hamish Telford.Hamish is separated from his wife, has a 7 year old son and a professor of political science who is considered upper middle class living in Abbotsford, BC. Hamish spends over 50% of his net income towards household expenses.  Hamish is hanging and “isn’t looking for sympathy, just some understanding of how hard it is to get by even for a member of the upper middle class.” He is more worried about others, “I can only imagine how stressed the other 95 per cent of the population must feel."

The point of the article was that Hamish had car trouble and needed to spend approximately $1500-$2000 to fix his car and he sadly had trouble doing so. People should think about the Real Life Ratio when considering the home they wish to purchase.

Montreal real estate values and personal debt

Hey everyone. So I've disappeared from the mortgage blogging world the past few months but now I'm back. I enjoy blogging way too much and there's so much new mortgage info ideas that I've wanted to share with everyone.

I've noticed a couple things in the Montreal real estate and mortgage industry lately which is personal debt and market values. I don't have any concrete statistics yet but what I can say is that I'm seeing clients lately that bought the past few years are realizing they cannot afford both their homes and a growing debt load. For many it's becoming harder and harder to refinance one's home and pull some equity to pay off debt.

From time to time I read Garth Turner's blog. Garth spends a lot of time speaking out about Canadian real estate, the economy and debt. On 16 December 2013, Garth wrote in a recent blog entry entitled, "The Blame," where he states,

"Ultimately there’s nobody to blame but those who create the demand for over-valued assets. People keep buying houses regardless of the process, since they have an endless appetite for debt....Since we’ve achieved another all-time debt record, with $1.2 trillion in outstanding homeowner mortgages (doubled within the last decade) and unprecedented line of credit and credit card balances, the central bank is handcuffed. If rates rise to chill house horniness and temper our piggish appetite for even more debt, it’ll push the economy into true deflation and ugly employment numbers."

Market values, cheap debt and the economic growth are all tied together. The dilemma is cooling the market and trying to manage debt. On my end I'm seeing market values cooling in the greater Montreal area however because cheap debt is still available many are still taking advantage.

Municipal values of homes in the greater Montreal area have increased as much as 25% in some areas but property values have not followed suit. So what does all this mean for the average person? Good question. First, if you're feeling the debt pinch and don't see yourself paying off that debt quickly (i.e. work bonus, extra commission, extra over-time, an inheritance or willing the lotto) then perhaps it might be a good time to down size or refinance. Yes this can play with emotions and ego but could save you a lot of stress and frustration by simply maintaining the debt load.

I've recommended to some of my clients lately to sell their homes, pay off debt (including close certain trade lines or lower limits) and still put a good amount down towards a new home. What's important to keep in mind, is don't wait too long before you start becoming late or default on you debt obligations. I have many clients and individuals that I've met with that have waited too long and are now stuck with expensive short to medium term 2nd mortgages.

Tips on how to improve your credit score

Managing your personal debts is often on our minds but have you thoughtabout your credit report? I met with a client over the weekend who told me he’snever seen his credit report. So we pulled it together and had a look. To hissurprise his score was in the 640s which is decent but clearly he could havebeen over 750. The credit system in Canada is an algorithm that tracks ourconsumption of credit. This “points system” ranges from 300 to 900 points. Ideally,to get mortgage with a top bank, meaning best rate but also favourable conditionsshould be generally above 650.

Tip #1: Watch your credit limits. In this gentleman’s particularcase he had maxed out all his lines of credit personal and secured. I am not afan of lines of credit as it’s very easy to spend the money and once you exceed50% of your limit then your score begins to drop over time.

Tip #2: Watch out for those pesky credit checks. Every time you applyfor a cell phone, satellite TV, a retail card, and even your contractor maypull a credit check on you. They need your permission but they don’t alwaysask! Too many checks in a concentrated period of time can drop your scoresignificantly.

Tip #3: Pay on time and pay at least your minimum. Sounds simplebut pay all your credit cards, car lease, lines of credit and even that cellphone bill on time. Remember even a wire transfer of funds can take 3-5business days to clear. The credit report tracks payment history for 6-9 years. If you have any collections take care ofthem ASAP.

If you keep all three factors in check then your score will increase butkeep in mind positive results are not real time rather can take 2-4 months adjuston your report. If you have a mortgage, debt-related questions or would like toshare an experience feel free to contact me. 

Too much debt?

Last week I spoke a little about mortgages and personal debtload. For the most part, I’d say the large majority of people have theirpersonal debt under control, however thus far in 2011 I have encountered a fewvery nice families where their mortgage payments and personal debts started toget or are out of control. If you think that your debt load is a burden itmakes sense to take a look at your options before things get worse. I don’twant to sound all gloomy as I am an optimist by nature, but I have seensituations where clients are forced to sell their homes due toover-indebtedness.  

If you’re worried about debt, the first thing you want tocheck is credit score and report details. Keep in mind that three major factorscan affect your score.  First, pay all yourdebts on time (i.e. making the minimum set monthly payment). Next, try not tomax out your limits on your credit cards and lines of credit. Finally, try tominimize the amount of credit checks. Credit checks include a new cell phoneplan, new credit cards (yes that includes department store cards) and otherservices where the vendor wants to know if you’d be a good client or not.  

Let’s put a couple things in perspective.  In 2010, as Canadians for every dollar earnedwe spent $1.48.[1] Thisaccounts largely for what is referred as personal or “bad debt.” On the otherhand, often times a mortgage is referred as “good debt.” Our banking system ismuch more regulated than our neighbours to the South but in general asCanadians we still over-spend. The old saying that it’s easier to spend it than earn it really makes sense.  I don’t want to sound too dogmatic this weekbut keeping eye on debt and credit is very important. We often take credit forgranted. When we need it sometimes we don’t have enough and it can work againstthe consumer.

If you have any specific questions you’d like to discuss innext week’s article please feel free to email me.

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[1]Jackson, Dale “Don’t let devotionto RRSPs distract from paying off debt” 17 Feb 2011, Globe & Mail http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/dont-let-devotion-to-rrsps-distract-from-paying-off-debt/article1893716/print/