Homeowners are the most obvious collateral damage in the Bank of Canada’s drive to lower inflation. Rising interest rates affect all kinds of debt, but mortgages are where people owe the most. For some insight on what homeowners are up against, I invited Zainab Williams of the financial planning firm Elleverity to do an e-mail Q&A. Ms. Williams is a certified financial planner (CFP) who says her clients are usually women who want guidance and accountability as they work toward their retirement goals. Here’s an edited version of our exchange:
How big an impact has inflation had on your clients and their spending?
Prior to the rise in inflation, many clients had a more relaxed attitude toward their spending plans. As inflation began to increase, I started to see a shift in attitude toward spending. Our discussions were more focused on budgeting, thrift stores, grocery and gas savings apps, reducing subscription services. Also, clients chatting with their kids about money and why the family was making certain lifestyle changes. Other steps include leaning more on bulk purchases, deleting credit card information from websites to reduce the convenience of spending, going through e-mails to unsubscribe from retailers and becoming more loyal to companies that offer rewards when they shop.
How are your clients managing higher mortgage rates?
A lot of my clients have a static variable mortgage, which means payments don’t fluctuate with the decrease or increase in mortgage rates. Rather, the proportion of payment going toward the interest and principal part of their loan is impacted. I have been advising clients who want to buy a house to do their own mortgage stress test by going to the government of Canada’s Mortgage Qualifier Tool to see how an additional $200 or $500 per month in mortgage costs can impact their loans.
What are you seeing in terms of regret from younger clients about buying a house?
Some clients who barely passed the mortgage stress test were more influenced by the fear of missing out rather than being objective with their finances and not accounting for the unexpected costs of homeownership. Because they were involved in bidding wars and were advised to waive conditions such as home inspections, they ended up purchasing homes that were overpriced and needed repairs. As a result, they ended up dipping into savings or debt for repairs. They are very concerned about their renewals, which might be at a higher payment level than they are used to.
What are financially stressed homeowners doing? Can you foresee some clients having to sell houses because they can’t afford them?
There are clients who have built enough equity to secure a loan against their home through a home equity line of credit, which can be used as a source of funds for an emergency. They are willing to stay. On the other hand, people who used alternative lenders are now spending more than 40 per cent of their income to pay their mortgage. They are running into issues because they are either financing their mortgage payments with other debt, or using capital accumulated during the pandemic. The concerning part is if you have more money going out than coming in, that bubble will burst soon. That is why people are opting to rent out rooms in their homes, or rent their homes fully and move back in with their parents.
How concerned are you that saving for long-term goals like retirement and saving for a child’s postsecondary education will suffer as people cope with higher living costs and interest rates?
Putting money away for your retirement takes a back seat because you are trying to meet your current expenses. If you were depending on selling your home in retirement in order to supplement your retirement income, the equity you were depending on drawing from will not be built at the same rate you anticipated, especially if you had also been using your home equity as your personal ATM or for funding emergencies. For parents who are looking at funding their children’s education, the conversation is starting to shift from fully funding this cost to paying a portion of the fees while the child supplements the rest with a student loan, scholarships, or part-time job.
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Rob’s personal finance reading list
Die with zero
As in, leave this world with zero dollars to your name. It’s a retirement strategy that caught the eye of personal finance writer and Globe contributor Bridget Casey.
Yes, the stock market has been awful
In fact, a U.S. investing blogger says the first six months of 2022 were the worst first half ever for diversified portfolios.
House prices falling, rents rising
A look at rental costs across the country – they’re up a lot over last year, but still below pre-pandemic levels. But for how much longer?
Young men and money
A Swedish study says young men with relatively high incomes are most likely to be fooled by “pseudo-profound BS.” Most astute about scams are older women with lower incomes. The difference: the level of arrogance about financial knowledge.
Today’s financial tool
Air Canada cancelled your flight? Here’s what you’re owed.
The money-free zone
The song Pharmacist by the Toronto-based band Alvvays is getting a lot of buzz, including a “best new track” rating from Pitchfork recently. You may recall a really good song they did several years back, Archie, Marry Me.
Listen to this
Dan Bortolotti, a leading voice on low-cost index investing through ETFs, talks to personal finance podcaster Jessica Moorhouse.
ICYMI
What I’ve been writing about
- The case for Canada: A BlackRock senior strategist on energy, banks, bonds and why our market rules in 2022
- Worried about rising interest rates, inflation or housing? Five ways to calm your mind
- Why you may be kicking yourself in a few years if you pass up current GIC and bond yields
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF Buyer’s Guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who’s best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP survivor’s pension
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