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Managing Long Term Debt

managing debt

The trend to longer repayment periods for consumer purchases concerns me. Historically low interest rates are encouraging people to take on more debt, so we end up in debt longer and paying significantly more interest in the process.

Take vehicles for example. By the end of year three the average vehicle depreciates by almost 50%, which mean you could owe more on your vehicle than it’s worth. With loans up to 84 months it makes it even worse. When I look at RVs and boats etc. the numbers look even worse, but these are lifestyle choices.

Long repayment terms could be used to your advantage if you generally keep your vehicles for many years. With the current low interest rates, you could potentially earn more by investing the difference in growth type investments. But this takes the commitment to invest that difference.

Many people trade vehicles in two or three years, so there are a lot of good used vehicles to choose from. Many consumers think vehicles are worn out at 100,000 kilometers, but with proper maintenance they will last three times this or more. If that new car smell is what you want, $5 buys a bottle of it at Wal-Mart or Canadian Tire!

When considering mortgages, 30 year fixed-rate home mortgages are now being offered in the USA at 3.8% compared to 3.68% for a 10-year locked-in mortgage in Canada. This begs the question; why can’t we get 30 year locked in rates here in Canada? It comes down to the fact that there’s much less competition for our business with our few big banks, and having one tenth of the population of the USA. A recent CIBC bank survey found that more than a quarter of Canadians would opt for longer mortgage terms than the standard five-year fixed rate mortgage.

Canadians understand that today’s historically low rates won’t last forever, and some are looking for ways to bring more predictability to their long term finances. With 25% of Canadians now saying they would choose longer terms, there might be a shift that way.

While longer-term mortgages may not be right for everyone, locking in a medium or longer-term fixed-rate mortgage could reduce the stress that comes with following interest rates. If interest rates rise in the next year or two, homeowners with shorter-term or variable-rate mortgages could see their payments move higher. Medium or longer term fixed-rate mortgage can provide a measure of stability and protection, especially for first-time homeowners.

Homeowners who work in industries that are subject to economic or seasonal layoffs might want to look at alternative mortgage options that offer a combination of a mortgage, line of credit and chequing account all in one. These are best suited to people with 40% or greater home equity. The line of credit allows them to use their available home equity to cover the monthly bills until returning to work. These same plans allow homeowners to pay down their mortgage or line of credit any time they have the funds to do so without penalty.

As with all things financial, Canadians should review their options with a qualified financial advisor. It’s important to understand all the pros and cons of these types of plans and review all options so an informed decision can be made.

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