Until debts separate us?


Money can’t buy love, but it can certainly make the warm, fuzzy feeling between partners disappear, if the studies are to be believed. A recent study in the United States found that a significant number of young adults would give up romantic relationships if the potential partner were in debt.

It’s not a phenomenon that can be dismissed as one of those American things. Closer to home, similar studies have shown Canadians would be just as likely to refer to it as quitting because of a partner’s debt.

While the COVID-19 outbreak had a profound impact on the household incomes of millions of Canadians, many faced unmanageable debt before the pandemic. Statistics Canada’s latest household debt report shows Canada’s average household debt to income ratio is over 170%, meaning the average Canadian owes $ 1.70 for every $ 1 they make. This is one of the highest consumer debt to income ratios in the world.

With the coronavirus pandemic exacerbating Canadians’ financial vulnerabilities, debt, especially bad credit, has taken center stage as a determinant of the staying power of a romantic relationship.

Let’s talk about debt, baby

Couples often avoid talking about money in the early stages of their relationship for fear of causing awkwardness and not wanting to come off as unromantic. However, money is a fundamental aspect of our lives, claims Tina Tehranchian, senior investment advisor Assante Capital Management Ltd.

“Avoiding talking about money in the early stages of a relationship can lead to nasty surprises and key arguments,” she says. “It is very important to read up on your partner’s attitudes towards money and to make sure that you at least find a middle ground that is mutually acceptable.”

Communication and transparency are keys to having a romantic or other financial relationship, says Teresa Valenti, senior wealth advisor at Meridian Credit Union. “It is important for both parties to understand where the debt originated and accumulated. This also shows how likely it is that there is a pattern and how the debt can be overcome.”

Depends on the debt

While debt is a four letter word, it is not an unforgivable anathema. Debt can come in many forms. Job loss, student debt, or a lavish lifestyle are some of the most common causes of debt, especially among younger couples. “If each partner knows the cause of the debt, they can assess the couple’s financial situation together,” says Valenti.

From there, they either find solutions that work for both or they decide their financial differences are too big and go their separate ways.

Acceptance is entirely a personal decision. “Acceptable debts can be mortgages, student loans, or small business loans that have had consistent payments in the past, which is a disciplined approach to managing future debt,” notes Valenti.

On the other hand, high credit card balances, car loan debt above the value of the vehicle, or even poor credit ratings are red flags. “When a partner has more debt than their income can manage, it is a cause for concern and can be a deal breaker,” she adds.

Experts tend to agree that there is no absolute number that would cause partners to move away from a relationship. “It all depends on each person’s tolerance for risk and indebtedness that they trust each other and their ability to pay off the debt,” says Tehranchian.

Good debt versus bad debt

Make no mistake, there is good debt and bad debt regardless of its size. Stubborn debt stemming from recurring borrowing should set alarm bells ringing. “Taking out loans to go on vacation or to buy expensive clothes, furniture or cars is seen as bad debt,” explains Tehranchian.

Interest paid on such debts is not tax deductible. Worse still, the borrower may have to “resort to expensive credit, such as credit cards or high-yield auto loans, that are difficult to withdraw,” she warns.

Debts that could hinder plans for financial stability shouldn’t be ignored, says Valenti. “A partner’s poor credit score or high debt can make it harder to get a mortgage approval, plan for the future, or live the lifestyle that the financially better partner wants,” she says .

Certain types of borrowing may be considered appropriate by some people. For example, as part of long-term wealth-building strategies, a mortgage on property or an investment loan are generally considered good debt. “If the mortgage is investment property or if you are taking out loans to invest, the interest costs are tax deductible, which makes this type of borrowing more attractive,” says Tehranchian.

If the borrower has stable cash flow and can service the loan through good and bad business cycles and despite increased interest rates, these types of loans are acceptable and could help build equity over the long term, she says.

Student loans are also viewed as a prudent investment. “If their payments are affordable given the borrower’s expected future earnings, they are considered good debt,” Tehranchian notes.

Any debt that increases your wealth or creates future value should be viewed as a good type of debt, says Valenti, but adds, “Each partner must be very honest and open about their financial situation from the start of the relationship.”

Pandemic can change the picture

The COVID-19 pandemic underscored the fact that our lives and livelihoods could change rapidly for reasons beyond our control. It also got the point: “When you’re at full capacity and don’t have an emergency cash reserve, this can be a recipe for trouble in tough times, even if all of your debts are well in debt,” says Tehranchian.

For many couples, the full extent of the financial implications of the pandemic may not yet be known. However, some of the most obvious financial fallout from the global health crisis is the accumulation of debt from mortgage and credit card deferrals, additional borrowing to cover expenses, and home purchases that are often $ 100,000 above asking price. “Deferrals lead to higher debt balances because most debts incurred interest expenses during the deferral period,” says Valenti.

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