When used responsibly debt can be a good thing — necessary and helpful. But does that mean the more the better — that you should take on as much debt as your bank will allow you to?
You might be inclined to think so. After all, that is what Canadian banks are encouraging their customers to do. They offer mortgages, home equity lines of credit, investment loans, car loans, RRSP loans … you name it. They even send out cheques with your credit card statements that encourage you to borrow more (assuming there is room on your card). And they are more than happy to give you as much as you qualify for. So it would stand to reason that since they promote themselves as sources of “financial advice” that they must think that it is financially prudent to borrow as much as you can.
Politicians are worried and have issued several warnings. But that’s about all they are doing. With a weak economy the traditional policy governments use to discourage borrowing (raising interest rates) is not an option. The economy is too fragile.
Don’t get me wrong — our financial institutions without a doubt have been more responsible than their US counterparts. For the most part they have refrained from lending to those who clearly cannot afford it. Instead our financial institutions focus on those who can afford it, and try to get them to borrow as much as possible.
Think about it. When you apply for a mortgage, how often have you been told “this is how much you should borrow” as opposed to “this is how much you can borrow.” Consider this example: two borrowers with identical incomes buying similar houses, only Borrower A is a long-term member of a generous pension plan, while Borrower B is not, and needs to make sizable RRSP contributions to have any hope of a comfortable retirement. Yet most if not all Canadian financial institutions will be more than willing to give Borrower B every bit as big a mortgage as Borrower A.
Here’s another example: Have you ever consolidated your debt? I know people who have. And in many cases their banks have given them more than they actually needed. It sounds like a good thing: “it’s there if you need it.” But often it is used regardless of whether you need it or not.
Depending on your circumstances it might be a good time to look at debt reduction strategies instead – ways to manage and ultimately eliminate debt. It’s worth a look.
Feel free to call or email for more information.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
