How Canadian Homeowners Can Protect Their Mortgage When Consumer Debt Is Rising

This week’s focus: Reducing consumer debt before it becomes a mortgage problem

Canadian households are receiving an important financial warning.

Consumer insolvencies increased sharply in June, rising 9.4% from the previous month and 11.5% compared with a year earlier. At the same time, fixed mortgage rates are facing renewed upward pressure as Government of Canada bond yields rise.

Neither development means Canadian homeowners should panic.

But they do reinforce the importance of protecting household cash flow before financial pressure becomes a mortgage problem.

Your mortgage may not be the problem

For many homeowners, the mortgage is actually among their lowest-cost forms of borrowing.

The problem can be everything surrounding it.

Credit cards, unsecured lines of credit, vehicle loans and other monthly obligations gradually consume household cash flow. When a mortgage renewal produces a higher payment, there may be very little flexibility remaining.

That is why homeowners should review their entire debt picture rather than examining the mortgage in isolation.

Start with expensive debt

If you regularly carry credit-card balances, reducing those balances can potentially have a much greater impact than making additional mortgage payments.

Consider listing every debt you have along with:

• Outstanding balance

• Interest rate

• Minimum payment

• Remaining term

Then identify where your money is costing the most.

The objective is not simply becoming mortgage-free faster. It is reducing the total amount of interest leaving your household.

Protect your emergency fund

Using every available dollar to pay down debt can also create problems.

Without emergency savings, the next unexpected repair, dental bill or vehicle expense may simply go back onto a credit card.

A better strategy may involve reducing expensive debt while simultaneously maintaining a reasonable cash reserve.

Financial progress is difficult when every surprise requires new borrowing.

Review your mortgage before renewal

Fixed mortgage rates have recently faced upward pressure from rising bond yields, while variable rates have remained relatively stable. That means homeowners should not assume that waiting until the last minute will produce a better renewal rate.

Several months before renewal, review:

• Your current mortgage balance

• Remaining amortization

• Consumer debt

• Credit profile

• Household income

• Monthly expenses

• Available savings

This gives you time to evaluate options instead of making decisions under deadline pressure.

Be careful when consolidating debt

Using home equity to consolidate higher-interest debt can sometimes reduce interest costs and monthly payments.

But consolidation only works when the behaviour that created the debt also changes.

Moving credit-card debt onto a mortgage and then rebuilding the credit-card balances creates a larger problem.

If consolidation is appropriate, consider reducing unused credit limits and building a realistic repayment strategy at the same time.

Leave room in your budget

Recent consumer-confidence data suggests Canadians are becoming somewhat more optimistic about real estate, with more consumers expecting property values to rise.

Optimism is encouraging.

But rising home values do not replace cash flow.

Whether buying, renewing or refinancing, households should leave enough room each month for emergencies, savings, maintenance and changing expenses.

Final thoughts

A mortgage rarely exists by itself.

It sits inside a much larger household financial picture.

The strongest mortgage strategy is therefore not simply securing a competitive rate.

It is managing debt, protecting cash flow and maintaining enough flexibility that an unexpected expense does not become a financial crisis.

Your mortgage should be part of your financial plan.

It should not be the entire financial plan.