Climbing Consumer Debt in 2018: What Does This Mean For Borrowers?

Every year, people across our country are falling further into debt – Canadians now owe $1.71 for every $1.00 of disposable income, and Alberta has the dubious distinction of having the highest average debt per person.

While most economists feel that Canadians can handle their debt load, the gap between individuals without consumer debt vs. those who are carrying a heavier load is increasing. Substantial household debt is considered to be a key risk to a country’s economic stability. What does this mean for Canada and what does it mean for borrowers? More importantly, what should we be doing about it?

Household Credit Market Debt Hits A New High

Canadians currently owe over 1.8 trillion dollars in debt, including mortgages, according to Equifax. When you take a look at debt without including mortgages, the average Canadian still owes $22,837. When broken down provincially, Alberta leads all other provinces with an average debt of $28,342 for each Albertan. According to an Ipsos Global News poll conducted in December, 2017, nearly half of those polled (46%) had no consumer debt at all, which suggests that those people who do have debt are carrying a substantial amount.

Millennials, aged 18 to 25 have the lowest debt at $8,617 per person, while those aged 46 to 55 have the highest average debt at $34,086. This generation has families and big mortgages. They have big responsibilities and therefore the most consumer debt.

In 2017, the Bank of Canada has added more stringent requirements to mortgages to ensure that future homeowners are able to handle their payments and not spend more on a home than they can afford. This affects first time homeowners, current homeowners and those wishing to borrow money against their home.

Overall, Canadians have a good track record of not defaulting on mortgages, but the increase in interest rates over the past year means Canadians who are carrying a large debt load, may have less disposable income to spend on groceries and entertainment, which in turns slows down the economy. It also means more Canadians are working harder and waiting longer to save up their down payments, while other home buyers may be discouraged by the higher mortgage rates and postpone the idea of buying a home. They may even find it difficult to qualify under the new regulations.

The new rules will affect current homeowners as well. Anyone with a mortgage coming due this year, who wanted to shop around for a better rate, would need to meet the new requirements.

Where Are Your Debts Coming From And Should You Worry?

Consumer Debt is money that someone would owe to a bank, credit card company or other financial institution after buying a new vehicle, clothing, electronics or other consumable goods that do not appreciate in value. When it comes to spending, Albertans have a huge appetite for big-ticket ‘toys’ such as pick-up trucks, recreational vehicles or boats, for example.

Although Canadians seem to be making the payments on their debt, the existence of so much debt leaves the country in a vulnerable spot. Individuals or households with high levels of debt have less flexibility to adjust to a job loss, unexpected personal expenses or significant changes in the economic climate. Historically, as people with large debt loads have struggled to make their loan payments, they have been forced to cut back on other spending, sacrificing loan payments or occasionally defaulting on loans altogether.

When credit is needed to buy basic living needs, it’s time to take a hard look at your circumstances. If you’re living from paycheque to paycheque, if you are constantly using your overdraft or making minimum payments on your credit cards, it may be time to talk with an Insolvency Professional.

A Squeeze On Borrowers

The Bank of Canada has increased interest rates three times since mid last year to a total of 1.25 per cent, with a plan to raise interest rates again in July. Although an interest rate hike of a quarter of a percent may not seem like much, these new rates could cost the average Alberta household over a thousand dollars a year in debt-service payments. Not only does this affect consumer’s purchasing power when it comes to big purchases such as houses and vehicles, it will also result in more cautious spending on things such as entertainment, furniture, clothing and other variable expenses.

The danger to a country when its citizens are carrying too much debt was explained by Jason Mercer, Vice President of Moody’s, “The strong credit quality of Canadian Consumer loans, thanks largely to record low unemployment in recent years, is under threat on several fronts: debt-servicing costs are increasing because of interest rate hikes, the proportion of riskier uninsured mortgages is on the rise, and longer auto loan terms point to greater borrower vulnerability. As debt-to-income levels continue to edge up, the first bite into bank asset quality will be felt in unsecured credit card portfolios.”

It’s likely that families will find it increasingly challenging for everything to add up at the end of the month. However, it’s important to know that there are solutions that debt restructuring professional can provide which help eliminate unsecured debt and implement a strategy to preserve the family home.

Time to act

It all adds up. A country is made up of its citizens and the financial health of the country is tied into the financial health of the people who live there. Having our personal debt under control will be beneficial both to the individuals and to the country as a whole.

If you have concerns around debt, sit down with one of our Licensed Insolvency Trustees to address and manage your consumer debt. For advice on all of the versatile and effective debt restructuring options available to you, contact the trusted team at Faber today!