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It's Your Money  

Mortgage 'vacation' ending

The six-month “vacation” that many Canadians took from their mortgage and other debt obligations is coming to an end.

It has been a little over six months since the official declaration of a global pandemic.

By the end of June, 760,000 Canadians had put their mortgages on pause and 2.6 million (or roughly 10% of credit consumers) had put at least one of their debt obligations on an active deferral.

These deferrals were meant to help households stay financially solvent during temporary unemployment with the hope that the labour market would significantly recover by the time the deferrals expired.

To further complicate the problem, the significant government handouts will also be ending around the same time. 

Last week, the latest Canadian household debt ratio numbers came out and they showed a dramatic decline from 175.4% to 158.2%, which sounded quite promising on the surface.

But the true story is that debt loads didn’t shrink at all during the past few months, only that disposable income went up due to the entire stimulus.

What happens if your deferral is about to end, but you can’t afford to resume payments?

Let’s look at two main scenarios and how to respond.

If it looks like you’ll be able to start making the payments again soon, you can consider several options.

A short-term loan or borrowing from a line of credit might be the simplest solution if you have either option available. But if you’re not confident you’ll be able to start paying again soon, this could put you much farther into debt in short order.

You should also consider reaching out to your lender and explaining your situation. If you can prove that you just need a little bit more time, they may be open to extending the deferral a little longer for you.

If you go this route though, be careful to fully understand what other ramifications their extension comes with. 

If it looks like you are nowhere near ready to start making payments again, some additional planning is likely going to be required.

It’s unlikely that a lender will do a significant additional deferral for you, but you should still discuss with them right away. If you wait until after you’ve missed a payment, your options will quickly dwindle.   

For some, a major decision may need to be made including selling your house or filing a consumer proposal.

Selling your home may not sound appealing, but it would be much better for you to be in control of that situation instead of having your bank foreclose and sell it for you.

A consumer proposal could allow you to reduce your non-mortgage debt and stay in your home as long as you can keep making mortgage payments.

What if you chose to take a deferral to build up a emergency cash reserve and can afford to not only start re-paying, but can also put that built up reserve against your outstanding debt?

At this point, the outcome of the pandemic is nowhere near clear and a second shutdown seeming more and more likely.

Even though you’re accruing a little extra interest from the deferral, you might want to consider going back to regular payments only and sitting on that cash reserve a little longer.

Once things fully settle down, you can decide what to do with your emergency fund then.

Regardless of what position you’re in, the worst thing you can do is nothing.

Be proactive in your financial situation, no matter how bleak it may feel and make the best decisions available to you by getting all of the information and the best advice.  



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Tough year for students

In a typical year, many post-secondary students would have spent their summer saving up for school expenses.

But COVID related lockdowns have affected the ability for many to earn income and the stress of expenses for this school year are much higher than normal.

In normal times, the cost of post-secondary education is high. Tuition while steep is just the beginning. Books, lodging and living expenses all pile up to the tune of about $60,000 for an average four-year program.

A professional degree such as law, medicine or engineering will typically cost twice that.

While this year may be more daunting than normal, there are still a number of things you can do to help ease the financial burden. 

If you haven’t done so already, make it a priority to apply for every available scholarship, bursary or grant that you can find related to your school and program.

Your education institution should have resources available to help guide you through this process.

Doing extensive research is key here as some grants are harder to find and in many years, a lot of grants will go unclaimed due to a lack of applications.

You should also look into any government related grants and loans available. Google “Canada Student Grants and Loans” and you’ll find a one-stop-shop for applying through your province of residence.

The amounts you can receive depend on several factors including your province of residence, family income, if you have dependents, cost of your tuition and if you have a disability.

Due to the pandemic, another resource students can access this year is the Canada Emergency Student Benefit.

This should be explored for any students not currently receiving the CERB or EI. Again, there is easy to follow eligibility and application information available online but note that the final deadline for applications is Sept. 30. 

Another idea to explore is a part-time job during the school year. Bringing in some income can help ease the stress of finances during the year.

For some, it can also reduce the required borrowing amounts and leave a graduate with a much smaller debt load when they graduate.

While everyone’s situation is unique, the above tips can help set you up for the best chances of success this coming school year.

Reducing stress surrounding your finances can help you be more focused on your studies and lead to a more positive overall experience in your post-secondary education. 

Remember, while these pandemic times are no doubt a weird period for students because nothing like this has happened before, things will get better and this won’t last forever.

Focus on the things that you can control and get the most out of your advanced education experience.



Ignore market; stick to plan

When the global financial crisis hit in 2008, many people close to or in retirement suddenly felt unsure of their ability to maintain their lifestyle after their portfolios went down so dramatically.

A fair number of those recently retired ended up going back to work and some who planned to retire shortly ended up delaying their retirement date.

With our most recent market drop in this spring, many Canadians at that same stage of life were left wondering what they needed to do.   

Fast forward almost 12 years since the 2008 crash (and a few months since the 2020 one) and the markets have not only recovered, but are again setting new record highs.

For those able to rationally weather the storm and stick to their investment plans, the market downturn has left no lasting effects. 

It was certainly a good wake-up call though and a lesson that some have already forgotten. 

Now that we’ve rebounded from the spring lows, what major risks are poised to derail your current retirement plans?

Will this recovery be a “V” or “W” shaped one? And should the answer to that really matter?   

The answer for most people is no, it shouldn’t matter. While the majority focus on a market drop as their biggest retirement risk, there are less obvious, but far more impactful, risks that should be the focus of your attention.

This week, I wanted to highlight the five main risks to your retirement so you can evaluate how well your own financial plan is prepared:

Longevity

With continuous advances in modern medicine, people are living longer than ever before. Could your portfolio continue to provide income to age 90? What about if you live to be 100? A sound financial plan will have modern longevity built in.      

Asset Allocation 

Particularly important to review after a strong market year or years, how much of your portfolio is invested in equity holdings and do you have “safe” investments to draw from during a downturn?

Maybe it’s time to take some “profit off the table” and move some of your equity holdings to less volatile investments. Proper diversity is key.    

Inflation

The potential for rising prices to erode the purchasing power of your investments is ever present. Over the course of 25 years, a two per cent per year inflation rate will reduce your “purchasing power” by 40%,

Make sure you’ve taken a realistic inflation estimate into account when reviewing your retirement projections. 

Withdrawal Rates

How much are you pulling out of your investments each year? Is the withdrawal rate you’re currently on a sustainable one?

Some argue that you need more money in the later years of retirement for health costs while others prefer to spend it while they still can. For most, a middle ground between the two is probably right but it’s important to know what you can really afford.  

Healthcare Costs  

Could a significant medical event severely disrupt your retirement plans? Or could the long term care costs of one spouse leave nothing left for the survivor to live on down the road?

Whether you’re about to retire now, still 15 years away or already well into your golden years, answering these five questions can help identify pitfalls that you may not be prepared for.

Being pro-active in your retirement planning can help you attain the retirement lifestyle you desire. 

A certified financial planner (CFP) can help you identify the type of retirement you want and create a plan to help you achieve it.



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Back-to-school planning

A new school year is just around the corner, and this one will no doubt look different from more “normal” years.

While many parents are still wondering how classes will look and what extra steps are needed to protect their children, at the end of the day most kids will still be going back in some fashion.

That means the usual back-to-school routines will likely be followed. 

But in these unusual times, when many Canadians are trying to be extra vigilant about their financial security, should the normal routines be followed?

For example, many parents seem to think that a whole new wardrobe is needed to kick off a new school year.

But is it really necessary? Are the clothes your kid is wearing this week going to be suddenly too small or out of fashion?

Don’t get me wrong, I understand students have a list of school supplies they will need to pick up, but that doesn’t mean a major spending spree needs to take place.

Half of those supplies are likely still sitting in a drawer from last year if you take some time to dig them out.

And yes, kids seem to grow incredibly quickly, so some new clothes may be required. But a complete wardrobe replacement should really be seen as excessive.

The point of all this? If you spend a bit of time creating a plan before you start spending on back to school wants or needs, you’ll be much less likely to over-spend.

As an added bonus, involving your child in the planning process can help them learn some valuable financial skills at the same time.

Before you go out shopping (or start shopping online), you should have a list of items you want and those that you definitely need. Consider buying only the items on the need side, or maybe putting a maximum budget to be spent on a few of the items on the want side.

You could even turn this into a friendly competition to see which kid can get everything on their need side for the least amount of money with a prize being an item from the wants.

A little bit of creativity here can go a long way. 

When you add up the cost of school supplies, clothing, electronics, and field trip fee and extra-curricular activities, September is an expensive time – even more so in a year when many people have faced reduced hours, job losses or other financial setbacks.

Instead of spending too much on this year’s back-to-school needs and putting your finances further behind, approach this September with a financial plan to keep things on track.



More It's Your Money articles

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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