Are Homeowners Properly Insuring Their Increasing Debt Loads?

These days, it seems like debt is the norm. Instead of it being the “elephant in the room,” it’s all everyone talks about ─ the bragging rights one obtains from taking out a loan to buy a luxury car, or funding a vacation trip entirely on credit.

According to a survey by Manulife Bank of Canada, homeowners are more comfortable with both holding and talking about their debt than their parents were.

“Recently I’ve noticed people are happy to talk about their debt as if it’s an achievement, almost like it’s a status symbol,” Personal Finance Expert Barry Choi remarks in his article. “Having the attitude that debt is normal, or ‘everyone has debt so it’s okay’ is the last thing we should be thinking.”

This kind of thinking could be attributed to “our current low interest rate environment, which makes debt management seem less intimidating than it was in the ’80s and ’90s, when rates were much higher,” says Jason Daly, VP Product, Marketing & Business Development, at Manulife Bank.

Atlanta-based business consultant Paul Paetz, though, sees dark waters ahead. Unlike Canadian economists, he expects Canadian mortgage rates to rise fast and potentially have a huge negative impact on the real estate market.

Canadian homeowners don’t seem to share the same concern. The survey states that 39% of homeowners feel more comfortable holding debt compared to previous generations, as opposed to the 13% who feel less comfortable.

This newfound confidence isn’t to say that Canadians are becoming better at handling their debt. In fact, 38% of Canadians believe that it will be harder for them to become debt-free than their parents, compared to 23% who think it’ll be easier.

The reason behind this discrepancy is our generation’s new (and false) definition of what debt truly entails.

Mortgage Debt is Debt, Too!

When we talk about “debt load” or “household debt,” we mean the total amount of debt a consumer owes to financial institutions. This includes any consumer debt — such as bank overdraft, credit card debt, and financed loans like car purchases or personal lines of credit — and (our favourite) mortgage loans.

Of homeowners in their 20s, 68% don’t take into account mortgage debt when they think about their debt, compared to 60% in their 30s, 48% in their 40s, and only 29% in their 50s.

The reason is that young homeowners may be more swamped with high-interest debt, like credit card debt. Credit card debt is tricky in the sense that leaving even $1 on your credit card will mean you end up having to pay interest on your entire balance.

While paying off debts with the highest interest rate first is a great way to reduce personal debt, let’s not forget that your mortgage debt still exists.

Insuring the Debt Load

Talk to your insurance agent about
how you can insure your debt

With the ever-increasing debt load, my best advice to any Canadian family would be to try and bring down their household debt while employing the services of a financial planner to make them aware of the best options available to protect their family financially.

A life insurance policy is a great place to begin. When you first bought your home, your lender might have suggested mortgage insurance to protect your new asset. But what you didn’t know is that there are cheaper individual insurance policies out there that offer so much more flexibility.

Unlike mortgage insurance obtained through a lender, which has declining coverage and lower payouts, a term life insurance policy offered through a life insurance company is affordable and puts you in control of your mortgage protection. The proceeds from a term insurance policy are paid to your beneficiaries, who can then use the money however they deem appropriate ─ such as paying off high-interest credit card debt first. As long as you continue to pay your premiums, your coverage will remain in force, regardless of the status of your mortgage changes.

Disability insurance can also be a good option. If an accident leaves you unable to work, your mortgage won’t be the only thing on your mind. Disability insurance replaces your income, enabling you to pay off medical expenses and pay the bills while focusing on healing and getting back to normal.

For more details on life insurance to protect your debt load, please contact us at 1-866-899-4849 or visit our term life insurance quote page.

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  • Paul
    October 23, 2014 at 11:49 am

    Hi Chantal,

    Thanks for the shout out, and sorry about missing it earlier. What I see in Canadians is the same thing I saw in Americans 8 years ago. Denial — a belief that they are immune from crashes because most have never seen a serious one, and hey, everyone else is loading up on debt, so it must be OK. Even in small cities, the mortgage debt load people are assuming seems crushing, and it won’t take more than a 1 or 2 percent rise in interest rates to put a lot of people earning good incomes out on the street because in terms of monthly expenses, they are already living on the edge. That seems to be true of most people under 40, if they have a mortgage.

    It’s hard to predict exactly when things will change, but it is certain that they will. Interest rates are at the lowest levels in more than 60 years, and can’t fall any further, which means the only direction is up.

    What will trigger it? One might ask what is holding rates down now. The US economy is still reeling, despite appearances. The only reason it doesn’t look a lot worse is that the Fed is pumping trillions of dollars of debt into the economy and holding the treasury rates artificially low to sustain the modest ‘recovery’.

    The amount of accumulated debt that the US now has is unsustainable — it is on the verge of becoming the next Greece with debt now significantly exceeding GDP, and if all tax receipts went to paying off debt, and nothing else (no social security, no healthcare/medicare, no military spending, no infrastructure repair, etc) it would take more than 9 years at zero interest to wipe it out. In reality, it’s like we have a 50 year mortgage to pay off, and that’s after we get rid of the annual deficit, which means decreasing spending by nearly 1 trillion annually.

    So, we know the day of reckoning is inevitable, and soon. Something will force the government’s hand — another oil crisis, China calling the loan, another war — we don’t know what or when, but it must happen. It must happen because when you owe this much, you no longer have control of your own destiny.

    The US will be forced to let interest rates rise, and when that happens, Canada will have to follow suit, or watch a massive flight of capital leaving Canada. Imagine if rates in the US only rise to 6% — historically a very low number. That’s enough to force Canada to at least 5%, and maybe higher. But, what if rates in the US jumped faster — to 8-10%, which is still only a moderate level over the last 30 years. Imagine all the million dollar mortgages in Canada resetting at 8 or 9%. That’s an extra 50-60K in annual payments, just for interest, of after tax money. And, how many people will be forced out of the their homes if they only need to find an extra 5-10k annually? I can’t see how the system can absorb that much stress, which means housing prices fall, and mortgage debt exceeds house value — just as happened in the US. We had entire neighborhoods in foreclosure, and banks unwilling to underwrite loans at any price. Many are still underwater on their mortgages 7 years later.

    So, in your shoes, I’d be cautious — very cautious — about taking on new debt, and recommending to everyone to take less than you think you can afford. Put at least 30-35% down, and if you don’t like what that gets you, don’t buy. When the market retracts, you’ll be surprised how much house you can get and be happy that you waited.

    • LSM Insurance
      October 23, 2014 at 2:24 pm

      Thanks for the insights Paul. Agreed ” It’s hard to predict (when Interest rate will change), but it is certainty that they will. Interest rates are at the lowest levels in more than 60 years, and can’t fall any further, which means the only direction is up.

  • Presley
    July 11, 2014 at 12:39 pm

    Mortgage is definitely a debt and I don’t think it’s right to consider it as not one. If you’re comfortable talking about your debt than I guess it’s okay, but I don’t think it’s something to brag about.

    • LSM Insurance
      July 11, 2014 at 3:38 pm

      I agree Presley. A mortgage is definitely a debt and shows the difference in the mindset of people today versus say 20 or 30 years ago