Risk & Reality-Combination Mortgages

General Angela Calla 28 Jun

Helen Morris, National Post · Saturday, Jun. 26, 2010

There is a lot to consider when deciding whether to go for a fixed or variable rate mortgage — not least, your tolerance of risk and your ability to sleep at night. Generally, fixed rate mortgages charge a higher rate and cost more, but payments are fixed for the term of the mortgage so you know what amount is coming off your principal. Variable rate deals, on the other hand, have generally cost less over the term of a mortgage but payments rise — and fall — with rate changes, so while your payment stays the same, the amount that goes toward the principle could vary.

In recent years, a number of lenders have begun offering mortgages that feature a fixed and variable combination.

“You would have multiple mortgage segments attached to the same home,” says Marcia Moffat, head, Home Equity Financing, RBC Royal Bank. You could set up a mortgage where, for example, you have “half your mortgage as a five-year fixed rate, a quarter of your mortgage as a two-year fixed rate, and you could take a variable rate mortgage for the other part.”

A number of brokers have seen increased interest in these umbrella products.

“Combination or hybrid mortgages are growing in demand,” says Rosa Bovino, a mortgage broker with Invis, “… mostly because people are unsure where the market is going. For those who are not comfortable locking in the full amount and want to play with the prime rate, there are some great variable rates out there where you’re … paying 1.9%, which is phenomenal.”

As well as being exposed to different interest rates, the amortization period for each segment can also be different.

“If you think of the other side of your balance sheet, with your investments, you would typicallydiversify– you wouldn’t take a single approach to all your assets,” says Ms. Moffat. “This is applying the same mindset to the credit side of the balance sheet.”

The hybrid mortgage has one other hidden asset, Ms. Bovino says. It can help households in which the mortgage holders have different risk tolerances.

“You do get couples, one is more conservative [and] the other one wants to gamble,” says Ms. Bovino. “That’s where you see a larger percentage of the clients taking on [hybrid mortgages].”

As with all mortgages, it pays to ask questions and read the fine print.

“There are a lot of nuances with those mortgages, and you have to be very careful with the lender you choose and the different … options and terms,” says Kim Gibbons, a broker with Mortgage Intelligence in Toronto. “I disclose up front what the risks are for those mortgages and when I do…for the most part, (clients) usually choose to go either fixed or variable. I am able to provide them with a better rate on either fixed or variable as opposed to the hybrid.”

Whether or not you pay a rate premium for a hybrid mortgage may depend on how it is structured.

“If they’re working with a mortgage broker, they’re going to get the wholesale rate so there is no upping any interest rate because you’re splitting your mortgage,” says Ms. Bovino. “Overall, by doing the combination mortgage you will probably pay less over the life of a mortgage … if a component of it is at the lower variable rate.”

Advisors also suggest thinking ahead to renewal time.

“When the mortgage comes up for renewal, there may be two portions of it that are up for renewal at different times,” says Ms. Gibbons. “This makes it very difficult to break the mortgage … you would have to pay penalties on the part that is not matured.”

While you cannot readily switch lenders mid-way through a hybrid mortgage, “the nice thing about them coming up at different times is that you’re not 100% exposed to any one particular rate environment. This is a way to hedge your bets,” says Ms. Moffat. “With a five-year and a two-year, you’ll be exposed to whatever the environment is in two years and the other in five years. It’s a bit of a laddering approach.”

HST won’t kill real estate

General Angela Calla 24 Jun

When it comes to the HST and real estate, consumer uncertainty reigns supreme.

But the much-despised tax will likely not impact the real estate market much, despite the widely held perception on the part of consumers that the HST is pure evil.

During a market analysis session at the Kamloops head offices of the Bank of Montreal Tuesday, BMO economist Michael Gregory said the HST, set to come into effect July 1 in both B.C. and Ontario, has already had some impact on real estate markets.

In both provinces, the looming implementation of the combined provincial and federal sales taxes has pushed buyers into the market earlier than they might otherwise have jumped in.

As a result, the spring selling season has ranged from warmer than usual in Kamloops to downright overheated in major markets such as Toronto and Vancouver.

But Gregory said the beat-the-HST rushes will soon end and a lull will follow. That downturn will continue through the rest of the year, he added.

That doesn’t mean the HST is an overall drag on real estate, he said. The tax has simply shifted buyers to the early part of the year. Once the numbers are crunched at year’s end, the impact will flatten out.

The HST will be felt most on new homes, which will be subject to the full HST, and existing homes above $525,000. Pre-existing homes below that level will not be subject to the tax.

Perceptions of the HST aside, the fact is Canada’s economic foundation is strong, said Gregory. The economy and job creation are on the rise in all parts of Canada.

Those factors ultimately have more impact on housing sales than the HST will ever have. If the financial fundamentals stay strong, so will markets.

It may take six months for people who have shied away from buying now because of the HST to get back into the market, but they will return, Gregory predicted.

“It’s only a matter of time,” he said. “It could be enough to postpone their desire until they have a little extra savings.”

Dick Pemberton, president of the Kamloops and District Real Estate Association, agrees. He said the Kamloops market is strong, despite the potential for a short-term HST lull, and he does not expect the HST will matter much in the end.

There are other more pressing factors that will affect the market before the HST, he said, including the potential for increased mortgage rates in the coming months.

Higher borrowing costs affect affordability, he noted.

The HST will see consumers charged more for all the professional services around the house-sale process — everything from legal fees to realtor commissions.

Will the HST force people to pay more for those services? Not necessarily, Pemberton said. He expects it’s likely consumers will be able to negotiate new deals with the professionals they deal with to compensate, at least in part, for the added cost of the tax on services.

Pemberton said of all the taxes the real estate market contends with, the HST means nothing compared to the impact of B.C.’s property transfer tax, which has been in place since 1988, when it was introduced by Socred Premier Bill Vander Zalm.

The transfer tax thresholds remain at the same levels they were in 1988, Pemberton said. Then, it was seen as a luxury tax. Today, due to the rise in property values, the tax affects more than 88 per cent of home sales in B.C.

The tax badly needs an overhaul, Pemberton said. Raising the threshold levels from the current $200,000 ceiling to $525,000 would immediately benefit consumers and make housing more affordable.

“Any tax that erodes affordability is a concern,” Pemberton said.

Darryl Caunt, president of the Kamloops chapter of the Canadian Home Builders Association, said many builders are not yet certain how the HST will impact them.

“We are still seeking some clarity,” he said. “The HST — it’s a risk. The HST will affect us, because it (affects) the affordability of the product. It’s a cost to the consumer.”

Of more concern than the HST is the level of inventory in Kamloops, he said. Typically the Kamloops market has shown it can absorb no more than about 120 new homes a year.

The city has already seen that many housing starts this year, raising the spectre of a competitive new home market as the year winds down.

Canada’s fiscal smarts on show

General Angela Calla 24 Jun

Country seen as model of sound banking regulation, money management at G8, G20



Unscathed by the global economic snarls of recent years, and as host of G8 and G20 summits later this month, Canada is presenting itself as a model of sound fiscal management and banking regulation.

After a short, but pronounced recession in late 2008 to mid-2009, the Canadian economy has rebounded heartily and is expected to post the largest growth among G7 nations this year and the next.

Contrary to its neighbour and biggest trading partner, the United States, Canada did not have to come to the aid of its banking sector and its real estate market flourished despite an international mortgage crisis.

Moreover, Canada entered the recession on a solid financial footing, which had allowed it to post back-to-back budget surpluses over the previous decade and trim its debt by about $100 billion.

Due to a drop in government revenues linked to the recession and massive spending aimed at softening the economic downturn, Canada posted a record $47-billion deficit at the end of fiscal 2009-2010 on March 31.

This represents, however, a mere 3.0% of its gross domestic product, “far below what we’re seeing in Europe and the United States,” said Patrick Leblond, an Ottawa University economics professor.

And the country, which already boasts the lowest debt as a %age of economic activity of any industrialized nation, expect a quick return to balanced budgets.

“It’s clear that Canada is in on a solid footing in terms of its banks, its financial system and the government’s finances,” commented Leblond.

Caution best describes the approach taken by those responsible for managing Canada’s public finances, as well as setting monetary policy and financial regulations.

It is true that “it’s easier in Canada,” said Finance Minister Jim Flaherty, because the country has only “five or six large banks” and “three large insurance companies.”

“Entering the financial crisis Canada’s banks were well regulated, well capitalized and well managed. This remained true throughout the crisis and remains true today,” according to the Canadian Bankers Association.

“The key,” said Prime Minister Stephen Harper, has been “a regulatory framework designed to avoid reckless risk and ensure transparency.” It is also important to “properly link risk, performance and reward,” he noted.

Canadian banking rules, which are reviewed every five years to keep pace with the sector, impose a limit on how much debt banks can carry of 20 times their liquidity.

“This ceiling applies not only to banking activities, but to all financial activities of financial firms,” a rule that is unique among industrialized nations, said Leblond.

It is not surprising, he said, that Canada, whose banking sectors emerged largely unscathed from the financial crisis, opposes the idea of a bank tax.

“The fundamental point on financial sector reform is getting standards right on quality and quantity of capital and caps on leverage,” Flaherty said.

It has applied equally rigorous rules for its housing sector, which resulted in only 0.44% of mortgages in Canada defaulting in March, according to the Canadian Bankers Association.

Inflation dipped, perhaps a short term hold on higher rates?

General Angela Calla 23 Jun

CTV.ca News Staff

Canada’s annual inflation rate dropped to 1.4 per cent in May from 1.8 per cent in April, mainly due to a moderation in gas prices and the falling price of clothing.

The latest Statistics Canada inflation report released Tuesday also shows core inflation fell to 1.8 per cent from 1.9 per cent the previous month — well below the Bank of Canada’s two per cent target.

Core inflation, which excludes volatile markets such as energy, is considered the bank’s key yardstick in determining whether inflation is at acceptable levels.

The bank raised the policy rate for the first time in two years on June 1, and some economists suspect it will continue along that path next month at the meeting of governors.

But the May inflation numbers contain little that would worry bank governors or indicate runaway prices.

Overall, Canadians paid 0.3 per cent more for goods in May compared month-to-month with April.

Meanwhile, gasoline prices appear to exercise less of an influence on inflation after largely governing the rate over the past two years.

The report shows pump prices 6.2 per cent higher than a year ago – a much milder increase than the 16.3 per cent rise noted the month before. In fact, gasoline actually cost 0.5 per cent less in May when measured month-to-month with April.

Six of the key indicators monitored by Statistics Canada registered price increases.

Food prices, one of the most significant elements in the index, inched up 0.8 per cent, the smallest increase since March 2008.

Transportation costs, which are tied to gasoline prices, rose 4.1 per cent. At the same time, shelter costs rose 1.3 per cent, as a 5.4 per cent drop in mortgage interest costs counterbalanced a 4.4 per cent jump in the cost of homes.

Prices for clothing and footwear declined 1.3 per cent from last year.

All provinces experienced a rise in inflation in May, but one that proved less dramatic than in the previous month, according to the report. Ontario had the highest rate at 1.9 per cent, while Manitoba showed the lowest at 0.5 per cent.

With files from The Canadian Press

The Mortgage Show-Hot Topics

General Angela Calla 22 Jun

Check out hot topics we will be discussing on upcoming editions of The Mortgage Show with Angela Calla, AMP Dominion Lending Centres


Click Here 

Tune in Saturday at 7pm on CKNW AM980 BC’s News Leader

Carney’s plan for canadian growth

General Angela Calla 18 Jun

St. John’s — The Canadian Press

Canada must shift its trade focus towards emerging economies, which account for two-thirds of global growth and are key drivers of the worldwide economic recovery, says Bank of Canada Governor Mark Carney.

Canada’s central bank head said Friday that countries such as China, India and Brazil are becoming growing centres of economic power and have a big impact on the price of oil, metals and other commodities, drivers of Canada’s resources economy.

“The relatively slow recovery expected in our most important trading partner, along with ongoing sectoral adjustments, means that Canadian firms have to find new markets,” Mr. Carney said in a prepared speech Friday to a Newfoundland energy conference.

“The global economy is increasingly multi-polar,” he added. “Emerging-market economies currently account for about two-thirds of global growth. They represent almost one-half of the growth in imports over the past decade, particularly of capital goods. They are the main drivers of commodity prices and are therefore important determinants of our terms of trade.

“More fundamentally, they are increasingly thought to be leaders and innovators in public policy and business. Canada needs to become fully engaged with these emerging centres of economic power.”

Canada’s trade with China, India and other parts of Asia has grown in recent years, mainly in grains, fertilizers, coal and other commodities. Chinese companies have also made major investments in Canada’s oil sands and mining sector in a bid to secure future supplies of energy and key industrial metals such as copper and zinc.

In his speech to the Newfoundland and Labrador Oil and Gas Industries Association, Mr. Carney also predicted the global recovery will not be smooth. And in the absence of other demand growth and exchange rate changes, there could be a shortfall of up to $7-trillion in worldwide GDP by 2015.

“The global economic recovery is proceeding, but it is increasingly uneven across countries. There is strong momentum in emerging-market economies; some consolidation of the recoveries in the United States, Japan, and other industrialized economies; and the possibility of renewed weakness in Europe.”

Mr. Carney also said global growth ahead will be more commodity intensive because emerging-market economies’ share of global growth is now two-thirds, rather than the one-half it was a decade ago. In a spring forecast, the Bank of Canada projected an additional 30-per-cent increase in the prices of non-energy commodities over the next few years.

That’s good news for Canadian resources companies, he said, but there are still major challenges ahead for corporate Canada, including a need to grow productivity and technology investments to become more competitive in the global market.

“The imperatives for Canadian businesses appear clear,” Mr. Carney said. “New suppliers need to be sourced; new markets opened; a new approach to managing for a more volatile environment developed

Walmart’s entry into lending

General Angela Calla 16 Jun

Wal-Mart Canada issues rewards-based MasterCard

First of several financial services products Barbara Shecter, Financial Post · Tuesday, Jun. 15, 2010

Freshly-minted Walmart Canada Bank kicked off its foray into financial services with a rewards MasterCard credit card on Tuesday, but the low-price retailing giant is not ruling out bringing serious competition to the country’s handful of big banks through products and services such as loans and mortgages.

“Walmart will always look to save customers more so they can live better. That’s our mission,” said Trudy Fahie, chief executive of Walmart Bank Canada. “The bank offering will be no different than our retail offering.”

This month, Walmart won final approval from Canada’s banking regulator to open a full financial services business in Canada, something the successful retailer failed to accomplish in the United States amid fierce industry backlash.

In Canada, consumer groups have pushed for more competition in the banking sector, arguing that services charges and other costs are higher because the landscape is dominated by the country’s six big banks.
Read more: http://www.financialpost.com/news/Walmart+begins+Canadian+banking+push/3156480/story.html#ixzz0r13I2hFo

The Euro Crisis explained

General Angela Calla 15 Jun

The subprime crisis developed into euro crisis

Paul Vieira, Financial Post ·     Angel Gurria is never short of words, or emotion. The secretary-general of the Organization for Economic Co-operation and Development will talk about almost anything economic-related, and do it with a passion that’s to be expected from a native of Mexico. Mr. Gurria, a former finance and foreign affairs minister in Mexico, has been head of the Paris think-tank since 2006, and has tried to provide a voice of reason during the economic crisis. In its most recent outlook, the OECD said developed economies should begin the process of budget-cutting and get debt levels back to more reasonable levels. And in Montreal this past week for the International Economic Forum of the Americas, the multi-lingual Mr. Gurria warned economies have a tough dilemma ahead: They have to maintain fiscal policies that lead to job creation, while at the same time get their own fiscal houses in order. Mr. Gurria talked to the Financial Post’s Paul Vieira in Montreal. This is an edited version of the interview:

Q Is the euro crisis the beginning of new woes, or did the crisis that broke in 2008 really end?

A You are absolutely correct. The euro crisis is just a different phase of the crisis. And just like the first manifestation of the crisis, this deals with overleverage. First it was overleverage of the banks and the stabilization of the financial system, plus the drop in government revenues due to recession, plus the increase in automatic stabilizers, plus stimulus spending. All this produced these exorbitant deficits and this mind-boggling accumulation of debt, which we would have just laughed at a few years ago of ever happening. The euro crisis is the same problem of overleverage, but has moved from the private sector to the public sector. This is just unsustainable and has to be fixed.

Q Any surprise by the drubbing in the markets, due mostly to Europe? And any shock at how intense it has been in such a short time?

A I think at some point in time, governments took the first decision to do whatever it takes. No more failures of banks. That has consequences. The second decision was to say, “We will go out and stimulate.” That was a deliberate, co-ordinated, co-operative type of decision, and something which we are seeing the consequences of now.

The first decision was linked to stabilizing the financial system. The second decision was a little bit different because, objectively, everyone went into some kind of stimulus, with China doing 15% of GDP, and the United States did something like 6%. The difference was the degree of response that the economies had. And then there was the result of the economy. And that’s when revenue drops, and you have to spend automatically [on unemployment benefits]. That was not planned. It is the result of a general economic situation. Countries were having enough trouble just with that, on top of digging into their pockets and going into deliberate deficit spending. And now we see the consequences.

Q The US$1-trillion rescue package from European policymakers was meant to calm markets and support the euro, but that has yet to materialize. What happened?

A It is going to. It was only on [Monday] night that European policymakers got it together in term of finalizing the conditions. The proposal has been going through legislatures. Germany got its passed two weeks ago, but some of the other countries have been circling the wagons because their parliaments were reticent. But let’s assume everyone chips in, and they are in. Then that’s done. Once the money is in place and ready to be triggered, it is going to produce a lot more peace of mind than it has right now.

There were a lot of skeptical voices out there because they did not see the package gelling. What they don’t understand is the way Europe works, or how things happen. They happen slowly, there’s always a little bumpiness, but it happens. And there was enough resolve. This is sorting itself out.

Q What topic, or topics, is going to dominate the G20 leaders summit in Toronto?

A In 2008, the G20 was focused on stabilizing the financial system, and avoiding a cataclysmic disaster. In 2009, it was about growth. This meeting in Toronto is going to be about a more balanced, more nuanced, more complex formula for growth. The balance has to do with the situation where you need to put an emphasis on growth but also on fiscal consolidation, or deficit adjustment. That balance, and the need to be looking at both sides, will be much more apparent now.

There is also a need for countries not to withdraw the stimulus just yet. The monetary tightening is something that is going to happen by next year. Countries have to roll out all the stimulus packages –some of them are finished, but some of them are still happening. So don’t interrupt until you are through with them. Finish the plan. And don’t start cutting the budget just yet, maybe start in 2011. Leaders need to, at the very least, strongly signal how they are going to address the deficit and debt issues. How are they are going to bring down the deficit to a manageable level, but ensure a soft landing. Then the ultimate issue is, whether markets will be more or less tolerant and patient

Time for a mortgage check up

General Angela Calla 15 Jun

Maybe your mortgage needs a check-up Andy Holloway, Financial Post · 

While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.

Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or newfound money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.

“A lot of people don’t like to face up to it but, doing an annual financial check-up is a very smart thing to do,” says Peter Aceto, CEO and president of Toronto-based ING Direct Canada. “Managing your financial lifestyle is just as important as managing your diet and exercise.”

Aceto says people often just wait for a renewal letter before they look at their mortgage, and even then they’ll likely send the contract back without considering if it is meeting their current needs because they feel changing providers or the terms is futile. But they should put just as much thought into a renewal or a review as they did when they signed the initial deal.

Kelvin Mangaroo, founder of RateSupermarket.ca, which compares mortgage rates and brokers across the country, agrees. “Canadian consumers tend to become complacent about their mortgage payments and they could be saving a lot of money.” He says home owners should annually review three main things: their current and expected future risk profile and net income as well as rates.

For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Aside from comparing rates, Ratesupermarket.ca has a few other online tools that can help consumers figure if a change is a good thing, such as a mortgage calculator and a mortgage penalty calculator that will show how much you can expect to pay to break your existing mortgage. You can also sign up for e-mail alerts that tell you when rates change.

Rates are an obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might want to refinance or renew early.

“You’re making a commitment to be mortgage free in 25 years so you should have a longer term view of what interest rates will look like over that period, says Aceto. “Make sure you’re comfortable with them and comfortable making those payments.”

Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years, according to Aceto.

Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.

Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”

Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. “Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner,” says Feisal Panjwani, a Surrey, B.C.-based broker with Feisal & Associates under the Invis Inc. umbrella.

A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.

But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes. “Making changes to your mortgage before you go into a new venture or before you retire would allow you to qualify much easier rather than waiting for your mortgage to come up for renewal,” says Panjwani.

In your 50’s and thinking towards your future, plan now!

General Angela Calla 14 Jun

The new face of debt

Andrew Allentuck, Financial Post · Friday, Jun. 11, 2010

For James Kennedy, a federal civil servant before he retired, and his wife, Jane, who retired from the Calgary civil service, the golden years have become a series of tough compromises. Both 59, they live in Qualicum Beach, B.C., a five-minute walk from the Strait of Georgia on Vancouver Island. They enjoy the mild weather, long walks on the beach and their beautiful home.

Trouble is, a lack of employment income combined with debt stalk the good times they thought they would have after they left their careers.

Their jobs paid them a total of about $100,000 per year. Today, as a result of too much house and the repairs it entails — repainting, new floors, new electrical circuits, new kitchen counters, custom French doors and other elegances — they carry a debt of almost $70,000, nearly twice their retirement income of $37,000 a year.

If they pay off the debt, James and Jane would face a cash shortage. They could do it, but it would wipe out all of their RRSPs and other retirement assets built up over their working lives. A tough choice.

“We used to think that our house would go up enough in price to cover our debts,” Mr. Kennedy explains. “But I don’t think you can rely on that.”

Their situation could be resolved by selling the house, yet they fear that having paid too much in renovations, even downsizing might leave them house broke — with a nice abode and nothing else.

“As I approach the age of 60, I don’t want to carry so much debt. There has to be an end to the debt. I want my mind to be clear that when we get our Canada Pension Plan and Old Age Security, we will be able to keep those benefits. We don’t want to go into our sunset years paying off our debts.”

See The Kennedys are not alone. A flurry of recent studies show a significant increase of retirees in debt. First was Investors Group, which said 62% plan to carry debt such as a mortgage into their golden years. Then Royal Bank of Canada came out with its Ipsos Reid poll, which found four in 10 Canadians retired with some form of debt, and one in four began retirement with a mortgage on their primary residence.

“More and more, Canadians are carrying debt into retirement,” said Lee Anne Davies, head of retirement strategies at RBC.

Just this week, BMO Financial Group noted less than half of Canadians 55 and over have a post-retirement income strategy in place and only a third have considered that they might outlive their savings.

It’s a new and dangerous trend.

Unlike their parents and grandparents, who remembered the Great Depression and regarded debt as a first step toward ruin, today’s retirees, especially Baby Boomers born between 1947 and 1966, grew up comfortable with owing others. Indeed, for many who grew up in the expansionary years of the 1960s, it was a normal and expected to have a credit card, fund a university education with loans, graduate to readily available mortgages and then to handy lines of credit from accommodative banks.

“Retirees, especially Boomers, are less averse to debt than their parents were,” says Peter Drake, vice president for retirement and economic research with Fidelity in Toronto. The contrast with earlier generations is stark, Mr. Drake adds. “They lived through a sustained period of strong economic growth and have adopted the idea that they will be well-off.”

Boomers have always had a major influence on consumer trends, and now they are changing the face of retirement as well.

“Boomers don’t have the same sense of saving for bad days that their parents had,” explains Charles Mossman, a finance professor at the Asper School of Business at the University of Manitoba. “When they retire, former workers, especially those who don’t have defined-benefit pensions that provide a guaranteed and sometimes even an indexed cash flow, wind up with more debt service charges than they can afford.”

According to a special report by The Office of the Superintendent of Bankruptcy that was released in 2008, 15.3% of all individual bankruptcies in Canada in 2003 were of individuals 55 and over, up from 6.9% in 1993. “Those over 65 are less likely to be able to recover economically and socially from the bankruptcy,” noted the OSB.

The risk of senior bankruptcy grows with age. A study for the Canadian Institute of Actuaries released June 2007, shows that longevity risk — the chance of living to a very ripe old age — poses the problem of running out of personal savings.

Given Canadians’ extending life expectancy — currently 78 for males, 83 for females — a person retiring at age 55 has a 40% chance of running out of personal savings by age 85 and a 90% chance of being flat broke by age 95. It should be noted the data shows that women, who outlive men on average and tend to have lower lifetime incomes, have even greater reason to fear poverty caused by longevity.

Compounding the longevity problem is the trend, promoted by some financial services companies, to early retirement. Remember Freedom 55? But retiring at that age means giving up what may be one’s most financially productive years. Indeed, if the average retiree has paid down most of his or her debts, and delays retirement to age 62, he or she can live in reasonable financial security, says demographer David Foot, an economist on the faculty of the University of Toronto and author of the 1996 bestseller Boom, Bust & Echo.

It would be wrong to label all debt foolish and all debtors in peril of financial catastrophe, argues Tina DiVito, head of retirement solutions at BMO Financial Group. “There is bad debt and good debt. Bad debt may be what one borrowed for a transitory pleasure, such as a vacation, after which the borrower has to pay high interest rates and gets no tax breaks.

“Good debt bears moderate rates of interest and is payable in a reasonable time period, perhaps as a part of an investment that makes interest tax-deductible,” Ms. DiVito says.

For good debt, consider the case of 61-year-old Montreal retiree Ioanna Jakus, who has maintained a mid-six figure investment portfolio while living on an after-tax income of less than $2,000 per month.

A former bank employee, she has a $10,000 line of credit with her stock broker. “I use the line to buy stocks and bonds,” she says. “I can deduct the interest I pay from my taxable income. My investments have been successful and have more than paid the cost of credit. What’s more, rates of interest are so low that borrowing to invest just makes sense for me.”

Not only has Ms. Jakus made intelligent use of credit, she has done so expertly, selecting low-risk GICs, bonds and blue-chip stocks with strong dividends. “I have always been motivated by the knowledge that only I can control my destiny,” she explains. “My husband and I paid off the mortgage — that was when interest rates were near 20% — and we never borrowed again for spending.

“Of course, I can clear my investment debt in a moment by using cash in one of my accounts. My philosophy has always been not to take risks that I cannot afford, especially when it comes to borrowing money.

“Nobody can look after me as well as I can,” she adds.

That’s a lesson a lot of retirees have yet to learn.