Monday 20/11/2017 - 07:01 pm


High consumer debt reflects "laissez-faire" attitude to borrowing


2015.03.12 02:13

 Canadians spend too much money they dont have.

Sound familiar?
It should. Economists have been sounding the alarm about consumer debt for the last few years. It was also a recurring mantra of our late finance minister, Jim Flaherty.
Yet despite all the warnings, a report released last week suggests Canadians continue their free-spending ways, which experts say is due to a carefree outlook on borrowing money.
 
"People seem to have a laissez-faire attitude toward debt right now, simply because whats been shoved down our throats — that interest rates are at an all-time low, and life is great… and the economy is not bad," says Laurie Campbell, CEO of Credit Canada Debt Solutions.
"It all just gives people a false sense of security."
According to a recent report by credit monitoring firm Equifax, the total amount of Canadian credit market debt — a figure that includes mortgages, non-mortgage loans and consumer credit — rose to $1.529 trillion at the end of 2014.
The bulk of this increase was new mortgage debt, suggesting Canadians are continuing to take advantage of lower interest rates to dive into the ever-burgeoning housing market.
 
The result, though, is that Canadians debt-to-income ratio sits at an all-time high of 163 per cent. That means for every dollar of income, Canadians carry $1.63 of debt.
As a credit counsellor, Campbell is on the front lines of the debt debacle, and says that the biggest problem for most people remains credit cards, which she says are too easy to obtain and so encourage people to fulfill all of their consumer desires.
She says many cardholders dont know that the average interest rate is about 20 per cent.
"Its very easy to impulse-purchase on — it doesnt feel like money," says Campbell.
New types of credit
But credit cards are only one small part of the larger picture. Another reason Canadian consumers are so debt-laden is that banks "are coming up with all these unique and different ways of lending money all the time," says Toronto-based personal finance expert Rubina Ahmed-Haq.
Home equity loans, which allow consumers to borrow on the value of their homes, have been especially popular in recent years, and so have bank car loans.
Moodys Investor Service reports that bank car lending — which typically has modest interest rates and long amortization periods, thus keeping monthly payments low — has grown at an annual rate of 20 per cent since 2007.
By far the biggest component of household debt, however, is mortgages. Given the seemingly unstoppable rise in home prices in Canadas biggest cities, consumers are taking on massive mortgages to get into the housing market.
According to a new report by the Royal Bank of Canada, mortgages are responsible for the recent jump in household debt. New residential mortgages rose 5.4 per cent in January compared to a year earlier, to over $1.2 trillion.
The main reason Canadians have been able to take on more mortgage debt is because interest rates are at an all-time low, thanks in part to the surprise cut in January to the prime rate set by the Bank of Canada, which is currently 0.75 per cent.
Ahmed-Haq says the previous Bank of Canada governor, Mark Carney, was "like a father figure," constantly reminding Canadians to be aware of household debt and the fact that interest rates would eventually rise.
 
The result, though, is that Canadians debt-to-income ratio sits at an all-time high of 163 per cent. That means for every dollar of income, Canadians carry $1.63 of debt.
As a credit counsellor, Campbell is on the front lines of the debt debacle, and says that the biggest problem for most people remains credit cards, which she says are too easy to obtain and so encourage people to fulfill all of their consumer desires.
She says many cardholders dont know that the average interest rate is about 20 per cent.
"Its very easy to impulse-purchase on — it doesnt feel like money," says Campbell.
New types of credit
But credit cards are only one small part of the larger picture. Another reason Canadian consumers are so debt-laden is that banks "are coming up with all these unique and different ways of lending money all the time," says Toronto-based personal finance expert Rubina Ahmed-Haq.
Home equity loans, which allow consumers to borrow on the value of their homes, have been especially popular in recent years, and so have bank car loans.
Moodys Investor Service reports that bank car lending — which typically has modest interest rates and long amortization periods, thus keeping monthly payments low — has grown at an annual rate of 20 per cent since 2007.
By far the biggest component of household debt, however, is mortgages. Given the seemingly unstoppable rise in home prices in Canadas biggest cities, consumers are taking on massive mortgages to get into the housing market.
According to a new report by the Royal Bank of Canada, mortgages are responsible for the recent jump in household debt. New residential mortgages rose 5.4 per cent in January compared to a year earlier, to over $1.2 trillion.
The main reason Canadians have been able to take on more mortgage debt is because interest rates are at an all-time low, thanks in part to the surprise cut in January to the prime rate set by the Bank of Canada, which is currently 0.75 per cent.
Ahmed-Haq says the previous Bank of Canada governor, Mark Carney, was "like a father figure," constantly reminding Canadians to be aware of household debt and the fact that interest rates would eventually rise.
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