Real-life case – Indebted, a Young Couple Will Wait Before Starting their Family
During his studies, 29-year-old Benoît accumulated debts of over $30,000. Today, with his partner Christine, he would like to start a family and buy a house. But is it the right time?
Originally from Bas-Saint-Laurent, Benoît spent 6 years in Montreal for his college and university studies. Even though he worked to make ends meet, he took out a student loan, which now has a balance of $19,000. He also used his credit cards, accumulating a total of $12,000 in debt. As for Christine, her line of credit amounts to $10,000. So, the young couple is dealing with a total debt of $41,000.
Purchasing a Home
Because they have jobs and earn $47,000 and $40,000 annually, respectively, Benoît and Christine are not overly worried about the future. In fact, their debt-to-income ratio is 35%, which is still within a reasonable limit. However, they would like to have a child and buy a house. «Their home purchase plan will increase their debt, while Christine’s parental leave will reduce the family income», warns Pierre Fortin, licensed insolvency trustee, president of Jean Fortin et Associés. Therefore, the couple would like to know the best time to realize their property acquisition plan and how to free themselves from their debts.
Delaying the Purchase
Buying a house is expensive, now more than ever, and entails significant additional costs, such as notary fees, transfer tax (welcome tax), moving expenses, furniture and appliance purchases, etc. If they also move away from their workplace, they will have to spend more on transportation and potentially buy a vehicle. The arrival of a baby, especially the first child, also brings additional expenses.
Adding to this the decrease in income caused by parental leave, Benoît and Christine could find themselves in a difficult financial situation and see their debt-to-income ratio skyrocket. «Therefore, I would recommend that they wait until the end of the parental leave before realizing their home purchase plan», advises Pierre Fortin.
In the meantime, Benoît can take the opportunity to reduce his debt. How? By consolidating his credit card debts with a personal loan. This will allow him to lower the interest rates from 20% to 12% and repay the debt more quickly: he will pay $265 monthly for 60 months and save $2,700 in interest fees. His debt-to-income ratio will also decrease from 35% to 33%.
Should he adopt the same strategy for his student loan? «This type of loan cannot be consolidated because it benefits from a guarantee from the Government of Quebec, which the bank would not want to lose by granting a consolidation loan. In any case, student loans have lower interest rates (around 4%) than personal loans, making consolidation less beneficial», mentions Pierre Fortin.
As for Christine, her line of credit has an interest rate of 8%, and again, it is better to keep it rather than consolidating it with a personal loan at an average interest rate of 12%.
Before putting their plan into action, Benoît and Christine should stabilize their finances and build a financial cushion to handle unforeseen expenses.
They should aim for a reasonable mortgage that fits their budget and doesn’t force them to tighten their belts or give up all the little pleasures of life, such as dining out, going out, and vacations.
The danger of a line of credit lies in the fact that the consumer is only required to pay the interest amount. Under such conditions, there is a strong temptation to pay only the minimum amount, resulting in a debt that never decreases!