Your Path to Debt Freedom
Making a regular appearance in the news quite recently is the talk of the debt to income ratio being on the rise in Canada. When you as a Canadian hear that, you understand that an increase in debt compared to income is a bad thing, but do you really understand the full impact it could have on your own situation?
Statistics Canada released the newest data showing that the amount of Canadian debt compared to disposable income now sits at 163.7% in the third quarter. This means that the average household has $1.64 in debt for every dollar of disposable income.
The proportion of households which hold over 350% of debt in comparison to their disposable income is now 8%, which has doubled since the 2008 financial crisis.
Governor Stephen Poloz estimated that 720,000 households could struggle to make debt payments in an economic downturn.
What It Means
Anyone who has debt that is tied to the prime rate in Canada is quite susceptible to an overload of debt if rates begin to regulate upwards back to the norm. These types of debts are generally mortgage debts and lines of credit.
Prime rates in Canada have historically always remained above 5% in Canada, even reaching a high in the early 1980s of over 20%. Will we ever see that type of rate again? It’s highly unlikely. However, let’s examine what might happen if we see the rate increase 3% in the next few years, bringing the rate back to an average of just under 6%.
Someone carrying a $300,000 mortgage, amortized over 25-30 years, will see an increase in monthly payments of approximately $500 per month. How many households have an extra $500 in their monthly budget simply to keep up their mortgage payments? This does not even take into account the other household debt, such as lines of credit, that may be affected as well by the increase in the prime rate.
What You Can Do
Canadians carrying these high debts should be taking notice of these potential increases. We are currently at historic lows for costs of carrying debt but much like anything else, this will not last forever. The Bank of Canada is well aware of this concern and the impact it would have on our economy. Because of this the prime rate has not moved very much in recent times, but it cannot stay at these historic lows forever. When the time comes how many households will be affected? If Governor Poloz is anywhere close in his estimation, quite a few Canadians will be drastically impacted.
Our next article on this subject will discuss what a healthy debt to income ratio should be and how you can achieve and monitor your own.
If your debt is already mounting or you are struggling to pay down your debt, we can provide a free consultation to assess your options, such as a bankruptcy, consumer proposal, or an informal settlement with your creditors. Contact your local Licensed Insolvency Trustee (formerly Trustees in Bankruptcy) by calling 310-4321, visiting our nearest location for a free consultation, or completing our free assessment form online.
Trustee in Bankruptcy
Rob is the Trustee in Bankruptcy overseeing our Barrie and Newmarket Offices. He is available Monday through Friday from 9am-5pm and is available for weeknight and weekend appointments. Feel free to contact him and he will be more than happy to help you with any question you may have.