The latest report on rising household debt that was released yesterday outlined that the average Canadian family owed over $100,000 in debt, at the end of 2010. In addition, the debt to income ratio was a record 150%. To put this in perspective, this means that for every $1,000 a household earns in after tax income, they owed $1,500. I was kindly invited on to CTV News to talk about this report and what it means for Canadians. You can find the clip below.
This is the latest example of a message that the Canadian government and the Bank of Canada has been communicating for the past year – Canadians are taking advantage of ultra low interest rates and taking on too much personal debt. Once interest rates start increasing and return to ‘normal’ historical levels, many consumers may find it hard to make the monthly payments on their lines of credit, personal loans and mortgages. This is the basis of the latest change to mortgage regulations that come into effect on March 18, 2011, and make it harder for many prospective home owners to qualify for a mortgage.
You can read more on the latest mortgage rule changes here.
These numbers always need to be taken in context rather than as isolated figures. For example, the 150% debt to income ratio may not mean much to most people, but to put it in perspective it was only 130% before the financial crisis, so we’ve seen a big jump in only a few years. Canadians are taking on more debt at a faster pace than incomes have been rising over the same period. This is not a long term sustainable situation..
It isn’t particularly surprising that of the $100,000 in overall household debt, the majority is attributed to home loans, making up roughly two thirds or $63,000. The more concerning figure is the remaining 1/3 of debt that includes personal loans and credit card debt which typically carry interest rate charges of 20-30%.
How did we get here?
The big question is how did we get into this situation. The main driver has been historically low interest rates that the Bank of Canada was forced to implement to try and counteract the global economic crisis. These were emergency measures that were put in place when it was needed but the reality now is that the Canadian economy is out of a recession and recovering well – the emergency is over. Interest rates will start increasing again. Economists are calling for this to start in June or July 2011, and Canadian consumers need to prepare for this.
With borrowing rates being as low as they are, many people took out additional loans they wouldn’t normally have and bought bigger, more expensive houses then they could have previously as we were in a time of easily accessible credit and a spending culture. Now that it’s over many of these same borrowers could be struggling to repay these loans at higher rates.
Debt management action plan
We’ve put together a few ways that Canadians can get back on track and manage their debts.
- 1. Review your current situation
- Get a handle on your whole debt situation and find out how much interest you’re paying on your mortgage, credit cards and loans
- Seeing the total amount may help spur you into action!
- Armed with this information you’ll be in a much better position to put a plan in place to pay off that debt
- 2. Set a budget
- Review your current income and expenses and try and cut back as much of your costs as possible to leave you with as high as a surplus as you can at the end of the month to use to pay down your debts
- There are many free budgeting and money management tools available including one of our partners, Mint.com
- The key is to try and stop spending and start saving!
- If you can’t pay for it out of savings – don’t buy it!
- 3. Make a payment plan
- Once you’ve set up your budget, put together a payment plan to pay the debt off as quickly as possible
- A good tip is to try and pay off higher interest debt first, like credit cards
- It may also make sense to consider debt consolidation, and taking out one single loan at a lower interest rate, pay off all the higher interest debt, and repay a single lender at the lower amount
- If you are looking for help there are some great not for profit companies out there, like Credit Canada that can help you put together a debt repayment plan and offer advice
If anyone has any other tips or suggestions on managing debt, we’d love to hear them, and welcome you comments below.