New Year’s debt resolutions

It’s an extreme example of the old saying that, just because someone is willing to lend you money, it doesn’t mean you are smart to borrow it.

It’s an extreme example of the old saying that, just because someone is willing to lend you money, it doesn’t mean you are smart to borrow it.

The BBC reported earlier this month that Luke Brett Moore, an unemployed young Australian, discovered that his bank had accidentally given him, in effect, an infinite credit line. The BBC headline sums up well what happened next: “The bank lent me $2 million so I spent it on strippers and cars.”

You don’t need to be a bank credit analyst to guess that he didn’t pay the money back.

I am assuming most Yukon News readers like you are not in the middle of a $2 million binge on strippers and cars. If you were, our newsroom would have heard about it by now.

But do you ever ask yourself if you have, maybe, borrowed too much money?

There are almost certainly readers in this situation. The Globe and Mail recently reported the number of Canadian households that owe more than 3.5 times their gross incomes has doubled since the financial crisis. Almost three-quarters of a million households are this deep in debt.

The paper’s finance section has created a handy online survey which helps you calculate your “Real Life Ratio.” This calculates how much of your “take-home pay is left after meeting a full range of household costs and putting some money away in savings,” including costs like utilities and daycare. Readers taking the survey were, on average, in pretty good shape . But beneath the average, 17 per cent had less than a quarter of their incomes left after the payments mentioned above. The paper describes this situation as financially stressed or on the verge of it.

The difference between the $2 million dollar man and most borrowers is that, for most borrowers, their bank didn’t make a mistake. The data shows that Canadians, even when relatively highly indebted, have low and stable default rates. They are highly likely to pay the money back. The banks have carefully developed financial models they use before approving a loan, and Canadian regulators have been pushing in recent years to make them even more conservative.

However, paying a big loan back usually means scrimping on other things. In the case of a mortgage with a 25-year amortization, it can mean scrimping on other things for a good chunk of your life. For the surprisingly large percentage of fifty-somethings who have piled consumer debt on top of their mortgage, it can mean a lifetime of debt payments.

The biggest financial decision in your life is usually your house. We’ve all heard stories from people who were surprised by how much their bank was willing to lend them. I know people who borrowed the maximum and those who took significantly less.

Consider a couple looking at a $400,000 mortgage. On a 25-year amortization, a five-year variable mortgage at 2.85 per cent would cost $1866 per month. They would pay $160,000 in interest over the life of the mortgage.

If they bought a house $50,000 cheaper, not only would they save $50,000 but they would pay $233 less per month and a whopping $20,000 less in interest over the 25 years.

Furthermore, if the $400,000 mortgage and its $1866 payment is on the edge of their comfort zone now, they should think about what could happen if interest rates go up. A lot of international economic mayhem can happen over 25 years. Already, the Federal Reserve in the US is signalling more rate increases in 2017. Who knows how long before the Bank of Canada starts following suit.

What if rates went up 2 per cent? This sounds like a lot now because we have become used to low interest rates. But ask someone who had a mortgage in the 1980s how much they liked paying double-digit rates. If the rate on that $400,000 mortgage went up to 4.85 per cent, the monthly bill would be $2304 and the total lifetime interest would be $291,000.

That’s a staggering $131,000 in additional interest costs.

Even if a person’s mortgage payments are bearable, consumer debt can push a borrower over the edge. Cars, trucks, trailers, sleds, kitchen renovations and vacations can push a household with a solid income into financial stress. Especially if it involves credit card debt with those punishing 20 per cent interest rates.

As Einstein noted, the world is divided into two groups of people: those who understand compound interest, and those who pay it.

The good news is that the sooner you start dealing with debt, the easier it is. The first thing to do is not to get over-extended in the first place. Think about choosing the smaller house, driving a smaller car and putting up with the ribbing because you’re riding an eight-year old sled.

But even if you already made those decisions, there are options. I’ve talked to a couple of Yukoners who downsized their homes early, and reaped the financial benefits. You can’t sell the vacation or kitchen renovation, but you can sell the seldom-used trailer or barely-needed 4×4. The cash can be used to pay down your credit line or mortgage.

Then, if you can economize in day-to-day life and increase your mortgage payments a bit, it can make a big difference. That $400,000 mortgage mentioned above ends up costing $17,000 less in lifetime interest if you pay an extra $100 per month from the beginning. It is also paid off earlier.

The new year is a good time for some debt resolutions. Even if you can’t bring yourself to put your 2016 Ski-Doo Renegade Adrenaline 900 ACE on Kijiji, at least go online and try the Real Life Ratio test at www.tgam.ca/realliferatio.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won last year’s Ma Murray award for best columnist.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Diane McLeod-McKay, Yukon’s Ombudsman and information and privacy commissioner, filed a petition on Dec. 11 after her office was barred from accessing documents related to a child and family services case. (Crystal Schick/Yukon News file)
Yukon government rejects Ombudsman requests for documentation filed to Supreme Court

Diane McLeod-McKay filed a petition on Dec. 11 after requests for documents were barred

Buffalo Sabres center Dylan Cozens, left, celebrates his first NHL goal with defenceman Rasmus Ristolainen during the second period of a game against the Washington Capitals on Jan. 22 in Washington. (Nick Wass/AP)
Cozens notches first NHL goal in loss to Capitals

The Yukoner potted his first tally at 10:43 of the second period on Jan. 22

Rodney and Ekaterina Baker in an undated photo from social media. The couple has been ticketed and charged under the Yukon’s <em>Civil Emergency Measures Act</em> for breaking isolation requirements in order to sneak into a vaccine clinic and receive Moderna vaccine doses in Beaver Creek. (Facebook/Submitted)
Former CEO of Great Canadian Gaming, actress charged after flying to Beaver Creek for COVID-19 vaccine

Rod Baker and Ekaterina Baker were charged with two CEMA violations each

Yukonomist Keith Halliday
Yukonomist: Are they coming?

One of COVID-19’s big economic questions is whether it will prompt a… Continue reading

Yukon MP Larry Bagnell, along with Yukon health and education delegates, announce a new medical research initiative via a Zoom conference on Jan. 21. (Screen shot)
New medical research unit at Yukon University launched

The SPOR SUPPORT Unit will implement patient-first research practices

The bus stop at the corner of Industrial and Jasper Road in Whitehorse on Jan. 25. The stop will be moved approximately 80 metres closer to Quartz Road. (Crystal Schick/Yukon News)
UPDATED: Industrial Road bus stop to be relocated

The city has postponed the move indefinitely

The Royal Canadian Mounted Police detachment in Faro photgraphed in 2016. Faro will receive a new RCMP detachment in 2022, replacing the decades-old building currently accommodating officers. (Joel Krahn/Yukon News file)
Faro RCMP tagged for new detachment

Faro will receive a new RCMP detachment in 2022, replacing the decades-old… Continue reading

In a Jan. 18 announcement, the Yukon government said the shingles vaccine is now being publicly funded for Yukoners between age 65 and 70, while the HPV vaccine program has been expanded to all Yukoners up to and including age 26. (1213rf.com)
Changes made to shingles, HPV vaccine programs

Pharmacists in the Yukon can now provide the shingles vaccine and the… Continue reading

Parking attendant Const. Ouellet puts a parking ticket on the windshield of a vehicle in downtown Whitehorse on Dec. 6, 2018. The City of Whitehorse is hoping to write of nearly $300,000 in outstanding fees, bylaw fines and court fees, $20,225 of which is attributed to parking fines issued to non-Yukon license plates. (Crystal Schick/Yukon News file)
City of Whitehorse could write off nearly $300,000

The City of Whitehorse could write off $294,345 in outstanding fees, bylaw… Continue reading

Grants available to address gender-based violence

Organizations could receive up to $200,000

In this illustration, artist-journalist Charles Fripp reveals the human side of tragedy on the Stikine trail to the Klondike in 1898. A man chases his partner around the tent with an axe, while a third man follows, attempting to intervene. (The Daily Graphic/July 27, 1898)
History Hunter: Charles Fripp — gold rush artist

The Alaskan coastal town of Wrangell was ill-equipped for the tide of… Continue reading

A man walks passed the polling place sign at city hall in Whitehorse on Oct. 18, 2018. While Whitehorse Mayor Dan Curtis is now setting his sights on the upcoming territorial election, other members of council are still pondering their election plans for the coming year. (Crystal Schick/Yukon News file)
Councillors undecided on election plans

Municipal vote set for Oct. 21

Whitehorse City Hall. (Joel Krahn/Yukon News file)
City hall, briefly

A look at decicions made by Whitehorse city council this week.

Most Read