06 Oct What Growing Household Debt Means For Canadians
Statistics Canada has released their latest numbers, which confirm a concerning trend: Canadians are borrowing more than ever before.
Second quarter results show household debt is at an all-time high. As recently reported by The Toronto Star, the ratio of debt to disposable income grew to 164.6 percent. This increase is in part because Canadians keep on borrowing more money, and salaries just aren’t keeping up.
What exactly does this increase mean? According to the article, “that means for every $1 of after-tax income Canadians earned, they owed nearly $1.65 in credit market debt, which includes mortgages, credit cards and other kinds of consumer loans.” (www.thestar.com)
Why is household debt growing in Canada?
Rising housing prices are partly to blame. As the market continues to be red-hot in big cities like Toronto, Vancouver and Victoria, Canadians are paying more and more for their homes. That leaves homeowners saddled with huge mortgages, often overextending themselves just to have a place to live.
Ironically, low interest rates also play a role in higher debt loads. Low interest rates on mortgages, for example, are enticing more Canadians to become first-time homebuyers. No-one wants to lose out on today’s ultra-low rates, or the opportunity to lock them in for the next five years or so.
How does this affect the average Canadian?
Growing household debt can create cash flow problems. After mortgage and other loan payments, Canadians have less cash to spend on other things. A change in interest rates would restrict cash flow even more. And with the talk of a recession, many Canadians are getting nervous.
But nerves aside, it is a great time for Canadians to re-evaluate their personal finances and make changes. Interest rates are at an all-time low, so it’s a good time to get rid of high interest debt by consolidating at a lower rate.
Will this have any consequences for Canadian mortgages?
In the last few years, the Canadian government introduced new rules to make mortgages harder to get. Gone are the days of 40 year amortizations and no money down mortgages.
Growing household debt levels will likely mean more new rules and regulations. In order to avoid a potential real estate crash like the one in the US, it may become even harder to qualify for a mortgage.
Eventually, the Bank of Canada will need to raise the interest rate. This too will slow down the frenzied housing market as loans get more expensive. Many Canadians are already stretched to the limit – a higher interest payment will price them right out of the market. Higher rates could also have the disastrous consequence of more people defaulting on their mortgage.
The good news? Currently, Canadians are managing their debt payments well. Household net worth is also up. By making good decisions going forward, Canadians stand to stay in good financial shape.
Are your finances in the best shape possible? Wondering if you could be paying less in interest and keeping more money in your bank account? Contact me today at 416-639-0786 or visit my homepage for more information on the best ways to manage your debt.