As is typical for January, the weather is cooler (albeit this year warmer than is normal!), the days are still short but getting longer and the spending hangover is beginning to set in. Many Canadians will be starting the new year in mega debt after maxing out credi
t cards over Christmas.

Christmas Debt

“Credit is very easy and you get caught up in the season and you tend to overspend,” said MNP Financial Advisor Naida Kornuta, accumulating Christmas debt. Canadians spent an average of $1,800 during the holidays, up 12 per cent from 2014. And once the January bills come it tends to create a lot of stress for people.

A recent Bank of Montreal survey shows 57 per cent of CanadiansChristmas Debt admit to making impulsive purchases over the holiday season. They are purchases that most usually regret and can throw off future financial goals. But while many spend more than they can afford others do manage to stick to a budget and that’s the key.

For anyone who finds themselves in serious financial trouble here’s the advice. “Really think about getting some professional advice, talk to your bank, there may be an opportunity for consolidation at a lower interest rate,” said Kornuta.

There a a few ways to consolidate debt:

1. Add the Debt to Your Mortgage: If you own a home, you might look to see if you have enough equity in your home to consolidate your debt with your mortgage. This is usually people’s preferred option since mortgage interest rates are usually much lower than other loan interest rates, and mortgages can be amortized (paid) over 25-35 years. This means you can arrange much lower monthly payments than with another type of loan, increasing your monthly cash flow, substantially in some cases. If you do choose to go this route, you should make sure that you try to pay off this extra mortgage as quickly as possible and don’t do this very often. If you find yourself doing this every year or two, that means that you are spending more than you make, and it is going to take forever to get your mortgage paid off at this rate.

2. Get a Debt Consolidation Loan: You can see if your bank or credit union is able to provide you with a debt consolidation loan. Banks and credit unions are typically only willing to lend people around 10% of their net worth (your assets minus your debts) on an unsecured basis. One thing to be careful about with a debt consolidation loan is that many people in Canada try to obtain consolidated credit payments in order to resolve their financial problems and get out of debt. However, keep in mind that the amortization of this loan needs to be long enough that you’re not paying so much per month that it’s more than the debt repayments by themselves. Often times that’s just not sustainable and people get in trouble again. Also, if you don’t create a monthly spending plan and budget your money, it’s very easy to continue relying on credit and get further into debt rather than get out of debt.

3. See if Family Will Lend You Money: If your bank or credit union can’t help you, then see if maybe a family member or friend is able to lend you the money necessary to consolidate your debts. Lending money to family members involves added risks. If a relative lends you money, but then you lose your job or get hurt and are unable to pay them back, that may sour your relationship with them. If your relative can’t afford to forgive the loan to save their relationship with you, then this could forever cast a shadow over your relationship with them. A wise relative may not wish to put themselves or you in a situation like this. So don’t hold it against them.

4. Other Options: If you are not able to obtain a debt consolidation loan, then maybe you can consider other options like selling assets to pay off your debts, downsizing your lifestyle to save money, cutting out expensive hobbies to save money, finding a cheaper home or cheaper place to rent, or increasing your income by taking on another job, taking in ESL students or foster children, teaching ESL, or something else. By increasing your income you can pay off your debts faster, and by cutting expenses you can save money to pay off debts faster. If you are able to do both, then you will be able to pay off your debts even more quickly. If you are serious about paying off your debts, there are ways to do it. You may have to be willing to make short term sacrifices for a better life in the long run. You may also have to consider the possibility that you may not be able to afford your current lifestyle. If you want to change your situation, you will have to do some things differently. Be honest with yourself, look at your situation with an open mind and seek the advice of others who you consider to be wise and trustworthy.

5. Debt Management Program or Orderly Payment of Debts: If none of the above options will work for you, you can speak with a Credit Counsellor to see what other options may be available to you. You may qualify for a debt management program or orderly payment of debts program (depending on your province). These programs help people consolidate all of their credit card payments into one monthly payment and often involve creditors reducing their interest rates to help you get your debts paid off in a reasonable amount of time. These types of programs often provide the added benefit of helping people identify the reasons why their debts got out of hand, and then they help people learn the skills necessary to manage their money well and not repeat their mistakes.

If you’d like to discuss your options with consolidating your current debt into your mortgage and increasing your monthly cash flow, give me a call – 403-804-7002. I’m here to help!

Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group