Dealing with debt

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There’s been a lot of talk in recent months regarding household debt in Canada, much of it related to home loans. However, a new article in The Globe and Mail makes the case that debt incurred through purchasing a home isn’t necessarily a bad thing. Debt is a fact of life; the key is differentiating between debt that can help you and debt that can hurt you.

The article makes the case that debt is a necessary and useful tool when it comes to investment. After all, there’s a big difference between maxing out a credit card in order to buy a shiny new toy and taking out a mortgage in order to purchase property that will grow in value over time.

For many Canadians, it’s clear that investing in homeownership has become a priority. According to a report from Statistics Canada, between 1981 and 2006, homeownership increased among Canadian households, rising from 62 percent to 69 percent.

“Households with higher incomes, sufficient wealth for a down payment and a stronger connection to the labour market were more likely to own rather than rent,” the report stated. “A lower cost of owning relative to renting was associated with homeownership.”

Few home buyers have the funds necessary to buy a home outright, making mortgages an essential part of purchasing a property. Additionally, current economic factors have resulted in historically low mortgage rates, making it more affordable than ever for Canadians to take the plunge into homeownership. Taking on debt in order to buy a home is not a reckless action; it’s an investment in the future. The key is dealing with your debt once you have it.

Pay off your mortgage faster
In addition to more Canadians taking on debt through homeownership, approximately half of Canadians believe reducing debt is important. According to data from the Canadian Institute of Chartered Accountant, 50 percent of Canadians say reducing debt is a high priority. Fortunately, there are plenty of ways to take care of a home loan quickly and responsibly. The most obvious way is to pay more toward your principal. Most home loan payments are applied toward interest, but by paying extra toward your principal, you’ll not only pay off the loan faster, but reduce the cost associated with interest. However, buyers need to make sure that whatever extra money they include in their monthly payments is applied to the principal, not simply set aside for next month’s payment.

It’s also possible for borrowers to increase the frequency of their payments. By switching to a biweekly payment schedule instead of a monthly one, borrowers can decrease the amount of time it will take to fully pay off their home loan.

Homeowners who wish to make more headway on paying off their loan have the option of refinancing. By shortening the length of your mortgage with a new loan, you can save money on interest and pay off your debt faster. The monthly payments will be higher with a shorter loan, but you will save money in the long run when it comes to interest.

However, before homeowners put their plans into action, it’s important to fully understand the terms of their mortgage. There may be penalties or fees associated with paying off a mortgage faster. Borrowers should speak to their lenders and find out the best way to pay off their mortgage quickly.


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