House Debt or Other Consumer Debt -Will The True Villian Please Stand Up

In the last couple of months, there has been several news worthy stories of house debt and other consumer debt. There are 2 groups lobbing the government to curb the other's debt vehicle.  Debt as a whole can be misused if it is not properly maintained. It just takes one or two life events for your debt to get away on you.

So the 2 school of thoughts lately is that house debt will get people into trouble and on the other side is Other Consumer Debt will be the evil debt getting people into trouble.

Lets take a closer look at each school of thought and see which one is the true villain.

1. House Debt interest rate around 3.29%
House Debt is the amount of money that you borrow to pay for your house. Right now the interest rates are at the all time lows, meaning you can buy a more expensive house with the same income dollars.
How can this be a problem in the world of Debt Villains, some of the problems are:
-if you lose your job you may not be able to make the payments (normal in every case)
-when you renew, the interest rate may be substantially higher and you may not be able to afford the payments,
-housing prices may fall and then again you may not qualify on what you owe to renew your mortgage. If you owe more than what the house is worth, no financial institution will loan you an extra amount of money if they cannot recoup it.

2. Other Consumer Debt interest rate around 23%
Other Consumer Debt is credit card, line of credit,vehicle purchases,buy now pay later, etc. This debt is used by the majority of Canadians to basically buy what they want- when they want it. There usually is very little to show for it except high interest payments.
-credit cards especially have a high interest rate. |Most people buy STUFF with no value after the fact.  If you lose your job you would have nothing to sell to help pay off most of the credit cards.
-many Canadians have a few credit cards  and shuffle payments from one to the other
-easy to get, especially if you are a young Canadian wanting to get into the credit game.
-If you do happen to buy items that you can resale- resale value may be 25-50% of actual cost if you are lucky.

While trying to figure out which  debt is the villain, I looked at the amount of debt. A house costs so much more than an average Canadian can put on a few credit cards. But, a house can be sold to recover most of the cost of the loan. Where as credit card debt, there is nothing to recoup. Average loss with a house or credit card debt on a bad case scenario may be around $30,000-$50,000. So that would be the same loss. But, there is one rule in Canada when a house gets sold by the financial institution and the house is sold at a loss, the loss can be recouped. The ex- owners still owe the outstanding bill. In this case the Other Consumer Debt is the Villain.

One fact that cannot be hid under the rug is there is always a resale value on a house, not so for the credit card debt.

 Another fact is  every person who buys a house with less than 20% down, has to buy default insurance, the House Debt becomes a better bargain then the Other Consumer Debt .

If you take it one step further and look to see which group has the most to lose if the Governmnet made changes to either one, you will quickly see the credit card group has the most to lose, with all their profits in their high interest rates. 4% versus 23%. That would be a whole lot of interest profits lost.

The real losers in this issue are the low to middle income bracket. They will have to save yet even more for a downpayment, plus if the amortization years are lowered they will have bigger monthly mortgage payments. These two points will likely take away any chance of being able to get into their own home.

The next time you come across a news story suggesting that rules on mortgages should yet again be tightened up, ask yourself why credit card companies are allowed to give credit out freely, as well as, gouge the average consumer with abusive interest rates.

Angela Kroemer, AMP
Mortgage Professional
TMG The Mortgage Group Canada Inc.
TMG Sharie Marie Mortgage Team
1.250.650.4182
akroemer@mortgagegroup.com
www.KroemerMortgages.com
Your Mobile Mortgage Professional in The Comox Valley