An interesting question, given how large the student loan debt a lot of kids have once they graduate. The real question is will a bank loan you enough for your house if you have $40,000 in student debt? My guess is they might, and they might even want you to combine all that lovely debt into 1 interest grinding place (with a very long payback period).

This is not very cheap

This is not very cheap and can leave a lot of debt at the end of it.

Typically a student loan can last up to 115 months (but can be extended or changed depending on  your circumstance) so adding that to your mortgage might seem like a good idea, as your mortgage will be for 25 years, so you have longer to pay all this down, but that is a mistake.

Here are a couple of reasons why I think this is a mistake:

  1. Your student loan interest payments get a 15% credit on your taxes, you forego that if you consolidate that into your mortgage. May not seem like much but it can add up, wonder if you could transfer your house onto your student loan (that is sarcasm folks, I am not advising you to do this).
  2. You can renegotiate your student loans if there are problems paying it back and have the period extended and other options, once this is lost in your Mortgage you don’t have this opportunity.
  3. I have a real “hate on” for “consolidation” of debt into your mortgage. The same reason I don’t like the idea of “expanding” your mortgage initially so you can buy new appliances (and thus you are amortizing your refrigerator over 25 years), adding any other debt to your mortgage make me financially nauseated.

The sad thing about this is that Students are graduating in Canada with a large enough debt load (these days) that they need to consider adding this debt to their mortgage.

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Who Cares About Debt I Only Pay 2% on my Mortgage

That was the gist of a comment left on my post Let’s Define Debt Free (which you might have seen yesterday on my Twitter Feed).

Interesting point of view that I don’t agree with for a lot of reasons, but mostly because rates are not going to stay this low for that much longer, but even with that aside, I have never been a big fan of borrowing money to make money.

I lived through the dog days of the 90′s in the High Tech World, where our CEO attempted to rationalize how for every dollar that Nortel borrowed they made $3 back, it never really made a lot of sense to me at the time, and at the end of it, maybe I was correct in my assumption that this didn’t make any sense. I realize that most businesses do have to borrow to get on their feet, but to continuously borrow without paying off debt has always seemed rather fool-hardy to me.

Yes, I could have made a crass comment about how one "poke" from debt could deflate this balloon

Yes, I could have made a crass comment about how one “poke” from debt could deflate this balloon

Getting back to the statement of why should I pay off debt when I can make more money investing, depending on what you are investing in, how long do you think the gravy train will last? If you have a Mortgage at 4% that you are simply paying down as needed, but you are investing that extra money in the Market currently, you most likely are ahead of the game (i.e. making more than 4% back on investments), but are you sure that is going to last, and are you taking your profits?

This is my other concern, I had many colleagues and friends who were “on paper” millionaires, but never took their profits (and jumped to the wrong conclusions). Many folks did one of the following:

  • Never took out their profits, and they kept thinking that the bubble would keep growing (it didn’t).
  • Borrowed against perceived profits, using their stock as collateral for loans to either buy oversized houses or extravagant vacations, those loans were called when those stocks went bust.
  • Fiddled while Rome burned (i.e. didn’t get out because they kept thinking things would get better) (yes I was very guilty of that too).
  • Sold, took their profits, but then invested in even riskier stocks (remember Pets Inc., or Groceries to the Door?). Some of those risky stocks burned through cash and then just shuttered the windows.

These are some of the reasons I am paranoid about Debt (yes I said paranoid) and feel it is a much better “investment” to pay it down, than invest in anything else.

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We Don’t Seem to Dread Debt

That is the hypothesis I can reach from a very interesting study published in the Harvard Business Review “Anticipating Pain is Worse Than Feeling It“ ¹. The conclusion of the study (which you have to pay to read, my apologies) is that the instinct to “Get it Over With” overrides our ability to wait patiently for something (specifically in the case of physical pain).

Is it Safe

Many Dread the Dentist, but evidently not Debt
Photo from Marathon Man Courtesy Paramount Pictures

As the study is about physical pain and how we deal with it, the example (I am interested in) put forward in the piece was:

“… People would rather get a level 6 shock now instead of waiting five minutes for a level 4 shock…”

The article did not profess that these findings could be transferred from physical pain to mental stress, but given I am a simple country financial blogger, let’s make that leap, specifically in the area of mental anguish that carrying long-term debt causes (i.e. all future statements here are conjecture on my part).

If we had a feeling of dread about Debt and what it will do to us financially in the future, one point of view would suggest that if we did we’d want to “Get it Over With” (i.e. get rid of  Debt early, or pay it off) to lower anxiety later on, but that is painfully obvious that this is not the case with Debt, since we keep seeing debt loads build and build, and in fact the opposite seems to be true (i.e. we seem to want to take long-term pain over short term pain).

The other point I suggest is that the purveyors of Debt (i.e. banks, credit cards, etc.,) may be doing too good a job mitigating the Dread that Debt should bring you, by masking your future problems, or by making it seem simple to pay off each debt (without thinking about the big picture of debt), and thus you don’t think there is a bad thing in the future, so this model doesn’t apply to debt. If this is the case they are doing an excellent job of mitigating and masking that long-term pain.

Why doesn’t Debt cause us Dread?


¹ - Harvard Business Review Volume 92 no.3

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Personal Finance: Lent Begins Today

As part of Lent, I am reflecting on my previous writings a little more, and this little chestnut was from 5 years ago, however, I have done some judicious editing  as well.

Mardi Gras was on Tuesday, so that means that Lent begins today and this is a perfect opportunity for folks to start something new with their Personal Finances (and their spiritual life, if they wish as well). Easter is a time for new beginnings or restarting something you need to resume, however, most people view Lent as a time to “find something to give up”. That is one way of viewing your Lenten journey, but another way is to look for something to Enrich your life for the 40 days of Lent (leading up to Good Friday and Easter).

Financial Lenten Journey

What areas of your personal finances could use either Enrichment or Better still a sacrifice that might help your financial well being? There are some very simple ones that I think about every year (and have done a few of them):

  • The Latte withdrawal penance. Cut out buying coffee for the 40 days of Lent and put that money aside, to either save, give to charity or pay down your debt. Keep track of this and see how much money you might be saving here, it’s worthwhile finding out where this discretionary money is going.
  • Read 4 Personal Finance books over the 40 days to enrich your understanding of your personal finances or your investing adventures. Building up your expertise over Lent is a good thing.
  • Brown bag it for 40 days, give up buying lunch at work, and bring your lunch instead. Another way to find out where your discretionary spending is going.
  • Take the bus to work for Lent. Leave the car at home, buy a bus pass and take the Bus to work. Yes gas is cheaper right now, but not driving might have other benefits for you (less stress, more exercise, etc.,).
  • Live on cash for 40 days and get rid of your credit cards. Freeze them in your freezer, lock them in your safety deposit box, or cut them up, but live on CASH only (no debit either) and see if you can do it, does it change your spending habits?

Think about these or suggest others, I am open to suggestions myself.

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Canadian Consumer Debt Load at $1.4 Trillion

Yesterday Equifax published a press release with a study of Canadian Consumer Debt in Q4 of 2013, and Canadians now carry about $1.4 Trillion dollars in Consumer debt (I believe their interpretation of Trillion is 1,000 Billions).  This is up about 4.5% from Q3, so we are building up more Consumer Debt, but what does it mean?

Are we more optimistic in the economy and thus thinking we can pay off the debt? Are we still spending ourselves into oblivion? I think we will only know in a while, but still a very interesting number to consider when talking about economic health in Canada.

Where is this debt building up?  Installment Loans and Credit Card had significant increases of 11.0 %, and 5.9 % year-over-year, respectively, which means we are buying more things with monthly payments and with our Credit Cards.

Why isn’t there more worry about this? Well, for one thing the delinquency rate on debt is dropping, so we are able to pay off our debt in a timely fashion. The following table from the report shows:

90 days or more Delinquency Rate

Region Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
Ontario 1.37% 1.37% 1.35% 1.28% 1.23%
Quebec 0.97% 1.00% 0.99% 0.96% 0.98%
West 1.07% 1.08% 1.06% 1.00% 1.01%
East 1.47% 1.50% 1.51% 1.42% 1.42%
Canada 1.19% 1.20% 1.19% 1.13% 1.12%

So we seem to be paying our debt off relatively well. More interestingly the report had a more interesting table breakdown of debt load by city:

Average Debt - % Change Year- Over-Year

Changes Year- over-Year Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013
Calgary -1.4% 2.1% 3.6% 3.8% 1.9%
Edmonton -0.2% 5.0% 6.4% 7.5% 5.3%
Vancouver 4.3% 3.2% 2.0% -0.3% -4.5%
Montreal 3.3% 3.5% 4.6% 4.1% 2.3%
Ottawa 3.1% 2.6% 4.2% 3.3% 2.1%
Toronto 1.2% 0.7% 2.4% 1.6% 0.0%
Halifax 3.7% 2.5% 3.3% 2.8% 3.0%

Way to go Vancouverites, paying down debt so nicely!

So is the economy improving, or are we simply digging deeper financial graves for ourselves?

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