By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, January 9,, 2024
With higher interest rates, inflation, rising prices and economic challenges, many Canadians are feeling financial stress. The fall 2023 Canadian Mortgage and Housing Corporation Residential Mortgage Industry Report found:
• As of August 2023, residential mortgage debt stood at 2.14 trillion (+3.4 per cent compared to August 2022). Year-over-year growth in the first eight months of the year slowed, as housing market activity decreased in comparison to the highly active market of 2022. Despite this slowdown in mortgage growth, home prices are on the rise again after a temporary drop in 2023.
• The decreasing ability of Canadians to make their debt payments is becoming a more significant vulnerability for the housing finance system. Reasons for this are:
- a high debt-to-income ratio (171.9 per cent in 2023Q2) due to household mortgages- interest rates have more than doubled since the start of last year; and- a significant share of mortgages with a variable rate (one out of three)
• Consumers moved away from terms of less than three years, indicating that hopes for an immediate decrease in interest rates have faded. However, the share of mortgages with terms of five years or more continued to be low as consumers chose not to lock in for a traditional term.
• Increasing delinquency rates among other credit products (auto loans, credit cards and lines of credit) and in specific mortgage segments indicate that an increasing share of credit consumers are struggling with debt payments.
Take control of your finances
One of the best ways to understand where your money is going and where you can make changes is by creating a monthly budget. Budgeting is a core ingredient that helps alleviate the stress associated with money issues.
The key is to create a realistic budget based on your situation and goals. Track your spending and make your dollars go further by sticking to your budget once it’s in place. Budgeting offers a step-by-step formula to figure out the relationship between your income and spending. It also helps you review all your costs and make changes either to increase your monthly cash flow or just feel less stressed.
The following steps can help you get started:
1. Determine your income
When creating a budget, you need to know exactly how much money you are bringing in each month and what gets deposited into your account. If you use your gross income before taxes and other deductions such as pension, you will end up overspending.
2. Track your spending
Once you know how much money you are bringing in each month, you will need to know what your expenses are. Reviewing all your monthly bills will tell you exactly where your money is going. It is important to put every expense you have in your budget, including fixed and variable expenses. Fixed expenses are items such as mortgage payments or rent, loans, strata fees, and childcare. Your variable expenses would be things such as groceries, gas, gifts, travel, clothing, entertainment and eating out. Variable expenses are typically costs you can cut back on. You can start by averaging your costs and keeping track of all your expenses. For example, keep receipts for a month and enter them into your budget.
3. Set realistic goals
Setting up realistic goals is key. It is critical to determine what you can live without and where you can cut costs. Ideally, when doing a monthly budget, you can consider the 50/30/20 rule:
• 50 per cent of what you spend is for needs such as your rent, mortgage, payments, insurance, utilities, car payments, groceries, gas.• 30 per cent of your income goes to wants such as gifts, entertainment, vacations, eating out, etc.• 20 per cent of your income goes to savings such as an emergency fund, retirement, and children’s education, or paying down credit cards and loans.
4. Make a plan
Once you have your goals, you can plan to improve your monthly cash flow and have realistic spending limits for each of your categories.
5. Adjust your spending
When you know how much money you are bringing in each month and what you are spending it on, you can look at adjusting where you spend your money to ensure that you stay within your budget — taking a realistic look at your wants and the things you can do without. This is a great time to also review your fixed expenses, such as your mortgage payments (for example, can you extend your amortization period or change your payment schedule?). Before considering this option, it is always best to talk to a mortgage expert to see what makes the most sense for you.
6. Stay on track
It is not enough to do a budget and then forget about it. In order to be in a better financial position and feel less stressed, tracking your budget on a monthly basis is important to catch any changes in your spending habits. It’s always a good idea to review your budget on a quarterly basis and take into account any increases in expenses or wages that may require changes in your original plan.
There is a free, online budget planner tool available from the federal government to help you at https://itools-ioutils.fcac-acfc.gc.ca/BP-PB/budget-planner