Living Beyond Your Means?

How good is your memory? In early 1990’s interest rates rose and the real estate market fell about 25-30%. The high-rise condo market was 'overbuilt’. Short-term interest rates are still at relatively low levels but have increased twice this past year and all indications are that they will continue to increase. Although only about 19% of existing condominium units are rentals, estimates are that close to 40% of new units being completed in the next two years will be investor purchased (rather than owner-occupied).

We are becoming more American every day. We have seen home values increase steadily over the last few years. We are finding that a large number of people are ‘refinancing’ their home (a polite word for needing to borrow more) in order to help renovate the home or to help pay for expensive vacations and / or private school for the kids. Parents often tell us how well their children are doing. They have a nice home, good career and belong to the right clubs. But we often find that they have a high mortgage, leased cars, and are making minimal annual RRSP contributions.

These apparently affluent people are at risk if interest rates rise further. The over-extended may be forced to sell in a dropping market to reduce their borrowing.

If you are wondering how this scenario could impact your financial plan, please book an appointment to review this with us.