Check up on your Debt!!

by Pamela Meger, CIRP, LIT
November 8, 2023

Understanding your debt in today’s economy is more important than it has ever been.  With interest rates from near zero to the highest they have been in close to two decades, individuals are becoming more and more concerned about their financial futures.

As a Licensed Insolvency Trustee who has been practicing for nearly twenty years, the last six months or so has been busier then ever and particularly more difficult.  When we are meeting with people, they are so stressed and struggling with anxiety brought on by debt and this has them believing things that simply are not true: that they are a failure, that they are alone, that they are without help, or that they can never be debt free.  There is help available.

To weather the storm of increasing interest rates and inflation, having a comprehensive understanding of all the debt you have can help you be more prepared for the future.  When speaking with individuals we are constantly hearing they don’t understand how they fell so far behind, or just not understanding what changed in their situation that things feel so much worse, or that they are struggling to see an end to their debt.

Truth is that most people did nothing wrong except for not accounting for the increase in interest rates, increased inflation especially combined with a mortgage renewal.  When you add those three things together or pair any of the two, you will have a change in cash flow which leads to less cash available to service debt or the debt you are servicing is growing because you are not able to pay enough to make the principal amount owing decrease.

For example, if you had a mortgage of $350,000 and signed a 5-year mortgage at 2.2%, your monthly payment would be approximately $1,500 per month.  Now if your mortgage renews in today’s market say at 5.4% for 5-years your monthly payment increases to approximately $2,100.  That increase of $600 per month could be funds you were using to pay down your unsecured debt which now, you no longer have available.  This is how easily things can change for your budget, and all you did was renew your mortgage.

The same can be said for line of credit payments.  Most line of credits require an interest only payment but to reduce the amount owing you will need to pay more.  If you took your line of credit out 5 years ago you may have saw interest rates between 3.0-4.0% but now they are between 7.0-8.0% and climbing.  What this means is that on an $8,000.00 line of credit your interest only payment 5 years ago would have been approximately $34.00 per month but now it would closer to $60.00 per month.  This means more monthly cash flow will be needed to pay towards the debt to see that balance owing go down.

To simply know what payments are due on what day of the month is likely not enough to make it through this changing economy.  I believe to get through these difficult times with the least amount of damage, people need to do the following:

  1. Truly understand their line of credit or unsecured debt; what are the terms of repayment? How much of each payment goes to interest and how much to principal? If you paid an additional $50.00 per month, how does that change the interest versus principal payment?  How much would you save by paying the additional $50.00?
  2. When does your mortgage renew? If you have a home equity line of credit, talking to the bank about locking in a rate before another interest increase happens.  Understanding when your mortgage renews, what your new payment would be so that you can start planning for the new payment.

No matter how hard we plan for the financial future, unfortunately, there will be people who can not make it through this economy, my advice to anyone struggling is: don’t be to hard on yourself and reach out to seek professional debt advice.  Licensed Insolvency Trustees offer impartial advice on various debt relief solutions.

In summary, understanding all your debt during these volatile times will be essential to weathering this storm.  To get through please don’t be afraid to reach out to your bank, your financial advisor or a Licensed Insolvency Trustee to help you understand your debt and help develop a budget that will ensure you are successful.

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