Household Debt Continues to Grow to Record Levels in Canada
For the first time ever, Canadian consumers’ debt is worth more than the entire economy. According to Statistics Canada data, total household debt amounted to 100.6 percent of Canada’s gross domestic product in the second quarter of 2016. Canadians now carry more debt than any of the G7 countries which include Canada, the USA, Britain and Germany.
Reasons for the Increase in Household Debt
There are several reasons why household debt continues to rise in Canada. One major reason is because of the rise in housing costs in many regions across the country. The increase in house prices has lead to larger mortgages for those in many Canadian cities, especially in markets such as Toronto and Vancouver. It also contributes to increases in rent. However, mortgage isn’t the only debt that has increased. Canadians have also continued to borrow more and more money for other purchases as well. According to credit monitoring agency TransUnion, average consumer non-mortgage debt rose to $21,686 at the end of the third quarter of 2016, up from $21,195 in the same quarter the year before. However, delinquency rates remained low, likely due to relatively low interest rates. However, high levels of debt can quickly become an issue if interest rates increased.
Why Debt is a Problem
Earlier in 2016, TransUnion warned that up to one million Canadians could face problems paying their debts if interest rates increased by 1 percent. Their study also found that more than 700,000 people would struggle to make monthly payments in the event of a quarter-point hike. While interest rates have been at or near record lows for quite some time, and many economists believe that rates will remain low for the near future, it’s important to remember that interest rates are currently well below what is considered a normal level. This means that the likelihood of them eventually increasing is quite good. That said, the potential of rising interest rates isn’t the only possible issue facing those with high levels of debt. In fact, if interest rates remain low, consumer debt could likely continue to increase as people would be more apt to take advantage of low interest rates to borrow more money, putting them into even greater debt. This could leave people in unmanageable situations down the road. However, this is not the only issue with large amounts of debt. When you have a large amount of debt, you limit your flexibility and your options. For example, if you are using your entire paycheque to pay bills, debt and expenses, that doesn’t give you any ability to save for emergencies. And emergencies do happen. Without an emergency fund, what will you do if your car breaks down and you need to get it repaired? Or if your roof leaks? Or if you are sick or injured and unable to work? In order to pay these expenses without any savings, you will likely have to go into more debt. Over time, this increasing debt will be unsustainable and you eventually will not be able to make your monthly payments.
Dealing with Debt
Debt can be difficult to manage and dealing with it can be quite stressful. Many people lose nights of sleep and face anxiety when it comes to paying bills and dealing with debt. In order to get debt under control, you will need to have a plan for doing so and you will need to stick to this plan. For most people, managing debt begins with building a budget. Sit down and determine how much you will need to spend on life’s various expenses. Then compare this amount to your income. The goal is to spend less than you make, so you will be able to put some money aside each month for debt repayment and to build an emergency fund. If you are unable to make ends meet without going into additional debt, look for places in your budget where you can make cuts. While some expenses (such as mortgage/rent, car payments, etc.) are fixed and cannot easily be changed, other payments such as grocery costs and money spent on clothing, entertainment, etc. might have more wiggle room. Come up with a plan for reducing these expenses, if possible. If you have tried to cut expenses and stick to a budget and you are still unable to repay your debt, consider speaking with a Licensed Insolvency Trustee. A Trustee can review your financial situation and provide you with details on the debt relief options available to you. Most Trustees offer the initial consultation at no charge.