A recent Manulife Bank of Canada survey shows that homeowners may feel that they have to choose between paying down debt and saving for retirement. When asked what they would do with their extra money if their debt was gone tomorrow, 70 percent indicated they would direct some of the money towards retirement savings. This was well ahead of vacation spending (55 percent) and home renovations (44 percent), the next two most common destinations for extra money if homeowners were suddenly debt-free.
“Paying down debt is important, but Canadians need to look at all of their financial goals and ensure they’ve got a plan in place to meet as many of those goals as possible,” said Rick Lunny, president and CEO, Manulife Bank of Canada. “A financial advisor can help you get a plan in place, and can also show you ways to make your money work more efficiently, so that you can pay down debt and save for retirement.”
An additional risk was highlighted by the finding that more than a third of homeowners surveyed would encounter financial difficulty if their mortgage payment increased by just 10 percent. A further 15 percent of homeowners said they could not absorb any increase in their payment.
The survey also showed that homeowners may be poorly prepared for a job loss. In the event that a primary income-earner lost their job, one in six homeowners indicated they would struggle to make their regular mortgage payment within just one month, and a further 27 percent would struggle to do so after three months.
The focus on reducing debt was reflected in the survey results with four in ten reporting that they either made extra mortgage payments or increased the amount of their mortgage payment in the past year. On average, homeowners with mortgage debt paid down an average of $6,300 in the past year, with 18 percent making an extra lump-sum payment, 17 percent increasing their regular payment, and five percent doing both.
Also, 56 percent of homeowners indicated that they reduced their debt in the past year, up from 51 percent a year ago, while eight in 10 homeowners said that being or becoming debt-free was among their top financial priorities.