That’s Taco Bell’s slogan. It’s meant to remind us that fast food doesn’t end with hamburgers. Tacos are pretty tasty in their own right. In the lending world, the closest equivalent to “the bun” is the five-year fixed mortgage. Like hamburgers are to fast food, the five-year fixed is to mortgages. It’s been the most popular term in Canada for years.

Yet, despite its prevalence, qualified borrowers owe it to themselves to think outside the five-year fixed. A little extra risk can sometimes yield a lot more reward.

Fixed five-year mortgages are especially popular in uncertain/rising rate markets (like today’s). People who can’t afford rate risk, and those who cannot qualify for shorter terms, often choose a five-year fixed by default.

Even individuals with rock-solid financial resources frequently gravitate to five-year terms. Much of the time that’s because they don’t want to over think the safety of a longer-term mortgage. In other cases, it’s because no one has ever shown them how much five-year fixed terms really cost over the long run. 

Click here to read the full CanadianMortgageTrends.com article.

That’s why it’s disappointing to see banks, advice firms, investment dealers and mutual fund companies treated solely like part of the solution to the lack of financial literacy in Canada, and not part of the problem as well. 

Better disclosure from the financial industry of fees, rates, terms and conditions is an important way to make Canadians savvier about money. And yet, the recommendations that the federal task force on financial literacy made public last Wednesday largely ignored this issue. 

Overall, the task force report has come up with some good suggestions that will help boost our financial IQ in Canada. That fact that it didn’t go further relates to the influence the banking and investment industry has in this country over all matters financial. 

Click here for the full Globe and Mail article. 

TORONTO – There was a surprising drop in the amount borrowed on credit cards by Canadians during the holiday-laden fourth quarter, but overall non-mortgage debt went up substantially across the country, a credit analysis firm reported Wednesday.

TransUnion said average total debt per Canadian consumer, excluding mortgages, was $25,709 in the fourth quarter of 2010 — up 5.6 per cent from $24,346 in the comparable period of 2009.

Only a small portion of the total in either year was drawn on credit cards, which usually charge among the highest rates of interest.

The surprise, according to TransUnion, was that the average credit card debt in the fourth quarter of 2010 dropped by 2.7 per cent from a year earlier to $3,688.

Lines of credit were the biggest form of consumer debt tracked, and increased to nearly $34,000 — up 8.8 per cent over the year.

“From the increase in lines of credit this quarter, one can safely assume that many Canadians ultimately relied on this form of credit during the last three months of 2010 and the important holiday shopping season,” said Thomas Higgins, TransUnion’s vice-president of analytics.

“Since many lines of credit offer attractive interest rates, many Canadians have learned to use credit cards in their initial purchase and then pay off or down the balance using their line of credit. This allows them to take advantage of both the loyalty programs many credit cards offer and lower interest rates of their line of credit.”

Auto loans were the second-biggest form of non-mortgage debt tracked by the report and TransUnion found the Canadian average rose to nearly $16,200 per borrower in the fourth quarter, up 11 per cent from a year earlier.

However, it found that total auto debt for the country as a whole declined to $45.8 billion in the fourth quarter, from $48.3 billion in the comparable period of 2009.

“While total auto debt continues to decline in Canada, it is interesting to see auto debt per auto borrower rise,” Higgins said.

“This means those Canadians with autos loans are either purchasing higher end vehicles, or newer ones.”

TransUnion’s analysis is based on an active credit population of 24.9 million consumers in Canada.

The Canadian Press http://www.therecord.com/news/business/article/485988–canadian-credit-card-debt-dropped-during-holiday-season

OTTAWA – A new report suggests the average family debt in Canada has now hit the $100,000 mark.

In addition, says the Vanier Institute of the Family, the debt-to-income ratio measuring household debt against income, is a record 150 per cent. This means that for every $1,000 in after-tax income, Canadian families owe $1,500. The Institute says in 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93 per cent.

Just as the debt ratio has climbed, the savings rate has slid downward.

In 1990, says the Institute, Canadian families managed to put away $8,000 for a savings rate of 13 per cent. Last year, the savings rate had fallen to 4.2 per cent, averaging just $2,500 per household.

Other data compiled by the Institute shows the number of households behind in mortgage payments by three or more months climbed to 17,400 in the fall of 2010, up nearly 50 per cent since the recession began. http://ca.finance.yahoo.com/news/Average-Canadian-family-debt-capress-2855603359.html?x=0

We’re told to line up our debts from highest interest rate to lowest. Tackle from the top and work our way down. But what if the card at the top also happens to have the biggest balance? 

A typical example may look like this: You’ve got your maxed-out HBC card, because of the holidays, sitting at 29.9%. Summer travel costs linger around at 19.9% on your Visa. And there’s that growing balance from meals out and mindless shopping on the card you use most often, your MasterCard, at 11.9%. 

I was looking at multiple debts similar to this, and I became quickly discouraged by the lack of progress, and overwhelmed by the string of debts still waiting in line. So, I tried the opposite approach. Instead of interest rates, I focused on balance – reordering debts from lowest balance to highest. I still paid the minimum payments on all outstanding loans, but the one with the smallest balance got everything else I could spare. When it was eliminated, I moved on to the second-lowest balance. I worked up the ladder instead of down – and was debt-free in slightly more than a year. 

Click here for more in the Globe and Mail.

Bank of Canada Governor Mark Carney and other policymakers have no doubt been scaring the pants off consumers who have loaded up on debt like there’s no tomorrow. Well, there is a tomorrow, and that was their aim. 

But while the risk of overweight debt levels is a “significant” one to the economy, the effects of the inevitable rise in interest rates should not be overestimated, National Bank Financial says in a new report.  

Carney has warned repeatedly that household debt levels are too high, and Finance Minister Jim Flaherty recently tightened up the mortgage market again. This came as the ratio of household debt reached a whopping 148% of disposable income – a level higher than in the US. 

“It’s not that Canadians are throwing money out the window,” said Yanick Desnoyers, Assistant Chief Economist at National Bank Financial. “Rather they are buying more houses, taking the homeownership rate to a record 70%. Since very few homebuyers pay cash, the resulting indebtedness is hardly surprising.”

Click here to read more in the Globe and Mail.

Any move by the Bank of Canada could “easily” cause house prices to collapse, Capital Economics warns in a bleak report that suggests the Canadian housing market is likely to suffer the same sort of crash that has plagued countries such as the United States.

The report released Thursday suggests that house prices in Canada have climbed at the same pace as that in the United States, but have not fallen at the same rate. In the United States, some markets have seen prices fall as much as 50 per cent through the recession.

As the central bank raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix, and Capital Economics predicts prices could fall 25 per cent over the next few years.

“Even small rises in official interest rates have been shown to have a big effect on homeowner confidence in other countries under similar circumstances as they can change perceptions towards the housing market very quickly,” said economist David Madani. “If the Bank of Canada does resume its monetary tightening this year, this could easily prove to be a tipping point for a house price collapse.”

Other market watchers expect higher rates to hinder price gains, but few are calling for as sharp a drop. The Canadian Real Estate Association expects sales to fall 9 per cent this year, for example, but prices are only expected to drop 1.3 per cent. It hasn’t issued a forecast beyond 2011.

The country’s bank economists have varied short-term forecasts, but there are no expectations among the largest forecasters that a crash is even likely.

Some have suggested drops of 10 per cent may be in order next year as mortgage rates move higher and households struggle to service record debt loads, and the Bank of Canada specifically mentioned the prospect of “a more pronounced correction in the Canadian housing market” as one of three key risks to the country’s economy.

However, sales data from the fall market showed that fewer houses have been listed and prices were largely unchanged from a year ago.

Capital Economics’ chief concern is that as the central bank raises rates, variable rate mortgages become more expensive and homeowners could find themselves priced out of their homes.

Fixed rate mortgages are tied to government bond yields, but would move in the same general direction. If a homeowner is already stretched financially, any hike could prove problematic.

However, a survey released by the Canadian Association of Mortgage Professionals released late last year showed that Canadians are confident they could shoulder higher mortgage payments without too much difficulty, with 84 per cent saying a $300 monthly increase was no problem.

If prices do fall as far as he predicts, “the knock-on effects to consumer spending and housing investment could be significant and perhaps even strong enough to push the economy into another recession.”

In January, the federal government shortened the maximum amortization period for mortgages to 30 years from 35 to help Canadians take on less debt at a time when it is at record highs.

While most private sector watchers expect the market to pull back in the second half of this year after a strong two-year run, the Capital Economics call for a 25 per cent drop is the harshest.

After hitting record highs in May, the Canadian market did slow across most of the country through the summer. Recent data from the Canadian Real Estate Association has many economists predicting a “soft landing,” however, with activity returning at a lower level and prices holding steady rather than rocketing higher each month as they have through the recovery.

Canadians are less optimistic about the outlook for the national economy and their personal financial situation in 2011 than they were last year, according to the January 2011 RBC Canadian Consumer Outlook Index (RBC CCO). Less than half (43 per cent) of Canadians feel the economy will improve over the next year, a marked decline from the 56 per cent reported in last January’s RBC CCO. In addition, only 38 per cent of Canadians now feel their personal financial situation will improve over the next 12 months, compared to 45 per cent a year ago.

The prevailing mood was reflected in the tight rein many Canadians kept on their expenses over the past holiday season, with 67 per cent responding that they managed not to overspend their holiday budgets. Of this majority, 28 per cent reported they had kept track of their spending by making a budget and sticking to it; 26 per cent stated they knew how much they had to spend and “once the money was gone, that was it”. By far, the largest number of respondents (46 per cent) said that they stayed within their budget because they didn’t want to go into debt or increase their debt load.

“We know that managing debt is top of mind for Canadians. Having a budget in place that you can stick to is one of the best ways to keep your finances in balance and take care of any debts,” said Ashif Ratanshi, head, Branch Investments, Deposits and Direct Investing, RBC. “This also gives you a good base from which to do your financial planning for the year. Ideally you want to ensure you are saving money for your future as well as covering your expenses today. Good financial advice can help you do both.”

Despite the cautious economic outlook expressed by the majority of Canadian respondents, there are indications that Canada’s economy will continue to grow in 2011 and 2012.

“While the pace of the recovery will remain moderate, we are projecting growth of 3.2 per cent this year and 3.1 per cent in 2012, representing the fastest pace of growth over the past four years,” noted Craig Wright, senior vice-president and chief economist, RBC. “As the economy continues to expand, we expect interest rates to drift moderately higher through the coming year. This should limit pressure on household balance sheets in an environment of continued employment gains.”