Why is Canada’s Debt to Income Ratio So High?

Canada's Debt to Income Ratio

Canadians have hit record debt levels . . . again! Our debt-to-income ratio is now sitting at 163.3 per cent. That means for every $1 of income we bring in, we now owe $1.63. This should be a serious concern, but according to a new household debt study by the Canadian Professional Accountants of Canada, 65 per cent of Canadians believe their financial discipline is very strong.

The Numbers Tell a Different Story

Canadians might be feeling confident about their finances, but the study sure paints a different picture. Fifty three per cent of non-retired households are not saving on a regular basis, while 60 per cent of those surveyed are only paying off a portion of their debt on a regular basis.  The truth is we’re at risk.

“Financial behaviors are largely driven by perceptions” says Kevin Dancey, president and CEO of Chartered Professional Accountants of Canada. “While the oil price decline may have a direct and negative effect on many Canadian households, the combination of lower gas prices and interest rates may create a feeling of financial comfort, but Canadians are vulnerable.”

It’s foolish to think that we’re not affected by what’s changing in the economy. Residents of Alberta have been directly affected by the falling oil prices, and we’re continuing to see job losses across the country. Statistics Canada reports Canada gained 29,000 jobs last month, but that’s not actually a positive sign. In March Canada gained 56,800 part-time jobs while losing 28,200 full-time jobs. A financial shock could come at any time so it’s best to be prepared.

Low Interest Rates Have Us Fooled

It was a complete surprise when the Bank of Canada cut interest rates to 0.75 per cent in January. The economy wasn’t doing well so by lowering borrowing rates, Canadians are encouraged to spend. There’s no hard evidence to prove that the increased debt loads are a result of low reduced rates, but it’s a pretty fair assumption. The problem is, we’ve come to accept these low rates as the new normal.

“We’ve had very low interest rates so that gives (Canadians) a false sense of security that things are ok,” says Dancey. “This attitude fails to address that many households remain vulnerable because of high debt levels and future potential interest rate increases or a change in personal economic circumstances.”

The majority – 79 per cent of mortgage holders – say they would have to make adjustments if their income declined by 25 per cent for three months. Another 24 per cent reported a decline in housing prices would reduce their retirement savings. These are some alarming numbers since 49 per cent of non-retired households surveyed say they have no emergency fund saved.

Take the Time to Educate Yourself

“Making the decision to take control of their personal finances is a real challenge” says Dancey.  “There are several avenues people can turn for assistance including the Financial Consumer Agency of Canada website and free financial sessions hosted in libraries and community centres.”

Taking the time to educate yourself about your finances is not easy but don’t worry, there’s plenty of help out there.

Low income families should check Prosper Canada. They work with partners to develop and promote financial policies, programs and resources. Another option is the community connect program, hosted by the Canadian Professional Accountants of Canada, which is available to all Canadians who are looking to increase their financial knowledge.

The Final Word

With these record numbers, it’s in our best interests to save more, spend less and reduce debt. That rainy day will come eventually, so be prepared for it. Gas prices won’t stay down forever, neither will interest rates. Don’t get caught up in the moment and make a money mistake that could hurt you for a very long time.

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