How did we get into so much debt?

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By Sabrina Almeida

As the Bank of Canada raised interest rates for the first time in seven years, many Canadians came face-to-face with their poor spending decisions. Mortgage and home equity lines of credit (HELOC) being their biggest worries. While only those paying variable rates might feel the pinch immediately, what it could mean for forthcoming renewals and lines of credit has thousands of home owners and investors on edge.

Car loans became the next concern. Not so much for immediate increase, as few are variable, but because many might find themselves driving less expensive vehicles when the loan term was up. Being forced to live within their means would not be so good for their social image!

A culture of falling interest rates for nearly a decade has caused many to be lured by rising real estate prices and a luxurious lifestyle and cast aside financial caution. South Asians, typically known for their monetary astuteness, also decided to up the stakes and join those living from paycheck-to-paycheck.

Having ignored all previous warnings of rising household indebtedness, carrying large amounts of debt became a normal way of life. As a result, even this modest 0.25% increase could push many over the financial precipice.

Financial advisors believe that this moment of truth, all be it a small one, could see a major change in the way we spend and borrow. Only time will tell.

There are many reasons why individuals get into debt with financial emergencies being lower down on the list. And save for a major moral overhaul, spending behavior could be really hard to change.

Greed and poor judgement typically trump all reasons for taking mortgage debt out of the comfort zone. Take the case of homeowners who have maxed out their home equity to invest in real estate. They were hoping to make big bucks and quickly, thanks to the out-of-control GTA home prices.

Mortgages on primary residence being propped up by basement renters, it hardly made financial sense to invest in another property, let alone the two and three rentals so many rushed into. An underground mortgage market and loan sharks added fuel to fire.

Tightening real estate laws and now the increase in prime rates are likely to cause them to lose more than their sleep. A week ago, CBC reported that BMO and CIBC had already hiked some of their mortgage rates, others will follow. This is hardly good news for those already living on the edge.

Social status comes next. The big house and luxury cars associated with social mobility have resulted in hundreds of South Asians getting in over their heads. After all it’s important to show Mr. Khanna next door that you are more than equal with the latest luxury car models in your driveway. Unfortunately, maintaining this false perception could cause some to lose everything. In a few situations, it has even led to marriage breakups and the additional cost of spousal and child support.

Poor money management and lack of financial knowledge lie at the heart of most debt—whether it is maxing out your HELOC or credit cards. The inability or reluctance to create a financial cushion that will tide you through the tough times is what pushes many into the swamp of debt.

I came across couple who opted for debt consolidation more than a decade ago and learned nothing from it. The hundred thousand they earned on the sale of their first house was quickly squandered. The new home was bought with fake RRSPs and soon had a lean on it. Marital problems exposed their financial troubles after which they applied for consumer proposals individually.
But there’s more than one family where both partners make poor spending decisions and are living life king size. It’s so much easier than putting yourself though the wants versus needs debate for every purchase, or being restricted by a budget.

For some others it’s a game of ping pong, with one claiming ignorance and expecting the other to pick up the slack. Many South Asians are also victims of tradition where finances were looked after by male family members and the females expected to be provided for.

Have you ever examined the reasons why you are in debt? The mirror might provide the best answers. Nonetheless it is never too late to pick up your responsibility and prevent yourself from making a bad situation worse.

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