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Canada’s Household Debt Crisis- How to Manage Your Debt Load

Canada's Household Debt Crisis

Canada’s household debt crisis and how to manage your debt load on a monthly basis is an important topic of discussion. Canadians are increasingly racking up more debt as total household debt loads rose to the tune of 4% since the beginning of the COVID-19 pandemic.

Bank of Canada, which is responsible for formulating the country’s monetary policy, says in a recent financial system review that many Canadian households are shouldering hefty mortgages compared to their salaries.

If there’s any good news in this situation it’s that there are solutions available that can help us manage our debt loads.

As you continue along you will see the many ways we can implement strategies to manage household debt in Canada. We’ll see that the right strategy will help us build a solid foundation for our households.

Household Debt Concerns

According to the aforementioned Bank of Canada report, house prices were up across the country by 23%.

Meanwhile, the Canadian Real Estate Association says that the average home price across the country was north of $688,000 in May 2021. This figure is up 38.4% compared to a year ago.

As house prices climb and as the availability of homes trails the demand, some people are opting to bite the bullet by purchasing homes.

They feel that doing so is better than waiting too long and possibly finding themselves in a real estate market where homeownership is unaffordable.

A high-priced market is creating situations where some of us are shouldering mortgages that we can’t really afford. This can leave homeowners more susceptible if interest rates rise.

Financial institutions conduct loan-to-value ratio assessments to ascertain any risks before approving any mortgage loans. Those deemed to be a higher risk will pay higher interest rates on any approved loans.

Ways to Manage Debt in Canada

We can see that household debt is a serious concern that can’t be taken lightly. But what you’ll also see below are some ways we can manage debt.

Mortgage Refinance in Canada

One way we can manage our debt load is by going the mortgage refinance route. This is done when we terminate our current mortgage agreements and embark upon new mortgage agreements.

We can refinance our mortgage — whether with the same lender or with a new lender — to obtain a better interest rate, to consolidate our debts, or tap into home equity. So there are some benefits to consider.

While a mortgage refinance offers benefits, it won’t come without a cost. Lenders will assess a hefty financial penalty if we break a mortgage loan pact. It’s important to explore all the pros and cons of refinancing your mortgage early with your mortgage broker.

It may or may not be in our best interests to pursue a mortgage refinance. But it is an option among other options. We need to choose the best option.

In order to refinance a mortgage, we need to contact our lender, seek out another lender, or contact a broker that will help us to find a lender.

Home Equity Line of Credit (HELOC)

HELOCs offer a lot of benefits to existing homeowners. For instance, we can borrow only the amount we require, there are flexible repayment options, interest is only applicable to the funds borrowed, and interest is lower than that on a credit card.

Home equity lines of credit also allow us to tap into the equity of our homes. In order to qualify for a HELOC, we’ll need a minimum down payment or an equity position of 20%.

If we prefer a stand-alone HELOC rather than a mortgage, then we’ll need a minimum down payment or an equity position of 35%.

The lender will also require a good credit score, proof of a stable and high enough income, and an acceptable debt level compared to our income.

The lender will also conduct what is called a stress test. In other words, we’ll need to demonstrate we can handle payments at an interest rate level that is usually more than the rate stipulated in the HELOC contract.

We also need to pass the stress test whether or not we require mortgage loan insurance on any funds we end up borrowing.

Debt Consolidation

Another option is to reach out to a reputable credit counsellor who can help us formulate a debt management plan that can include debt consolidation. A debt counsellor will contact those we owe money to on our behalf.

This professional will seek to consolidate our debts into a single monthly payment. The agreement will require that you pay down or off several debts but make your finances manageable.

The main benefits of debt consolidation include the following:

  • Turn numerous monthly payments into a single affordable monthly payment
  • Lower interest rates or sometimes pay no interest at all
  • Improve credit score in Canada since our credit utilization rate will decrease
  • Reduce stress, since we won’t be worried about household debt
  • Pay off the debt faster than had we not had a debt consolidation agreement

One word of caution before contacting a credit counsellor — it’s important to do some research before choosing one. Ensure you hire one that has a reputation for helping people to manage their debt load situation.

Learn More About Reducing Household Debt

While the household debt situation in the Great White North isn’t something to take lightly, there are solutions to help us manage our debt. Debt might be an issue for us now, but it doesn’t have to define our future.

Interested in learning more about housing and debt control? Explore our blog to learn about how to manage debt in Canada, pay down debt, and build a strong financial foundation for the future.