With the new year upon us, now’s the time to take a look back at the personal-finance highlights of 2012. Financial experts weigh in on a few momentous money matters of the year we’re leaving behind -- and share their tips on how to best handle those financial issues in 2013.
Record levels of personal debt
Debt to annual household disposable income is at an all-time high in Canada, forcing many to rethink how much credit to take on.
“Historically low interest rates have made borrowing cheap. Housing costs in certain cities are extremely inflated, meaning it costs a lot more to purchase a home and service the debt," says financial planner Rhonda Sherwood, wealth advisor at ScotiaMcLeod.
"And with the sluggish economy over the past few years, people may have had to use credit to pay for living costs more than in the past."
Canadians have become too focused on their wants, choosing to live beyond their means and finance that lifestyle with debt, Sherwood adds.
"I think that unless a serious wake-up call such as the housing bust in the U.S. happens [in Canada], Canadians will continue to use credit to fund wants. If interest rates climb or housing prices drop, people may owe more than their homes are worth. That’s when the trouble really begins. Or if the economy stays sluggish and more credit is used to fund the basics and lifestyles, debt loads will get out of control.
“Interest rates will rise one day, so it’s highly advisable to get debt levels under control now while they’re still manageable.”
Tightening of mortgage rules
In an effort to curb runaway home prices and debt levels, Finance Minister Jim Flaherty announced a new set of mortgage rules designed to cool Canada's hot housing market.
“The federal government has brought in numerous changes to Canadian mortgage rules in the past five years, with the most significant change we see affecting our clients being the lowering of the amortization period on high-ratio insured mortgages to a 25-year maximum,” says Karen Gibbard, mortgage consultant at Gibbard Group Financial.
“Even though in the long run holding a mortgage for a longer period of time meant that clients were paying more interest overall, the technique of allowing a longer amortization allowed some clients to get into the market where they may otherwise not have been able to buy," she adds.
For example, if you look at a mortgage of $350,000 -- based on a five-year fixed term at 2.99 per cent -- the average Canadian today needs to earn approximately $15,300 more per year to qualify for the mortgage to purchase a home with a 25-year amortization than they did when amortizations were allowed up to 40 years.
“Moving forward, I see purchasers having to make significant adjustments to what they’re buying,” Gibbard adds. “I believe they will need to lower their expectations. The lowering of the maximum amortization periods means that a client’s borrowing power has been reduced and purchasers will need to either come up with a larger down payment to get that higher-priced property or simply purchase something cheaper.”
Changes to Old Age Security (OAS)
“There is a segment of the Canadian population that’s going to be reliant on OAS in retirement, and if they don’t understand what’s happening or changing they won’t have time to adjust and to plan for retirement,” says John Tracy, senior vice president of TD Canada Trust, pointing to the federal government’s decision to gradually increase the age of eligibility for OAS and the Guaranteed Income Supplement (GIS) between the years 2023 and 2029 from 65 to 67.
“If someone is 20 years away from retirement, they need an extra $12,000 in today’s dollars to mitigate the impact of the change to OAS.
How do people create a habit of savings so that they’re prepared for whatever’s coming at them in life?
"If we can get people to think about this earlier, the pain of the OAS changes isn’t going to be as significant. What’s important is starting to create the habit [of savings] even if it’s $25 a month … You can ratchet it up over time, and that little amount will help create the habit. You can increase by $10 a month six months from now then bump it up to $50 a month. You will make progress even if you start small.”
Historically low interest rates
Got a new car sitting in your driveway? You probably took advantage of Canada's ultra-low rate environment in 2012.
“The reason historically low interest rates have been making the news is that they’re increasing overall debt levels of our society and allowing people to artificially live beyond their means,” says financial advisor and portfolio manager Brett Simpson, chair of Rogers Group Financial.
“For the first time in 20 years my team and I are recommending our clients to shift their strategy in borrowing away from variable rates to a five-year fixed. We believe interest rates are going to go up ... Housing prices are totally overinflated in Canada and due for a correction.”