According to BMO’s recent report on Canadian consumer indebtedness, 80% of Canadians are in debt, owing on average of $93,000. According to Equifax, in an earlier report, Canadian consumer debt excluding mortgages averages $20,910.
While consumer debt levels are rising, BMO’s research indicated Canadians are less stressed – a sign of their confidence in their ability to repay. Confirming sentiment, national delinquency rates remain low at 1.12%, demonstrating Canadians are in fact able to service their debt.
The good news is, most Canadians are using loans to finance what BMO’s senior Economist Sal Guatieri, classified as good investment. “Given the angst about high debt burdens, it’s somewhat comforting to know that Canadians are generally accumulating good debt to finance investments in their homes and educations, as opposed to bad debt such as discretionary spending on vacations and entertainment.”
As a previous Financial Post article revealed, it wasn’t always this way. Canada used to be a nation of savers. In 1982, we pillow stuffed 20 per cent of our annual income. By 2014 that rate was down to 3.6 per cent.
Even Americans, who we like to characterize as spendthrift consumptionists compared to us, are saving more than Canadians. In fact, we are behind only Greece in the growth rate of household debt – a cautionary tale, if there ever was one.
|Cited as Significant Contributors to Debt by Region|
|Source of Debt||National||ATL||QC||ON||MB/SK||AB||BC|
|Buying a house||49||%||41||%||55||%||46||%||45||%||55||%||51||%|
|Buying a car||46||%||52||%||47||%||49||%||43||%||37||%||42||%|
|Health Care/Drug Costs||25||%||24||%||28||%||26||%||17||%||17||%||28||%|
|Stocks and investments||15||%||10||%||16||%||20||%||8||%||9||%||13||%|
How long can Canadians rely on low rates to fuel their investments and what happens when rates inevitably rise? “While rates are at all-time lows, it’s important that Canadians are aware of the risk associated with taking on additional debt, regardless of its purpose. Having a financial plan which includes careful budgeting and asset allocation can help avoid any risk and uncertainties,” said Sameh Elrefaei, Head of Personal Lending, BMO Bank of Montreal.
BMO’s report demonstrated that while almost half of Canadians feel some stress about their current debt load, the percentage is lower compared with the past two years. The majority believe they will pay off their current debt in five years or less, however, 46 per cent of those with debt plan to take on more debt in the coming year.
What the Canadian economy has to be weary of, is a steep decline in home values in western Canada. While the oil patch continues to reel, without a clear path to recovery in the near future, mortgage debt could become problematic if home values fall. Also, personal lines of credit secured by home equity could also be at risk.
An earlier BMO report, indicated that nearly half of Canadian credit cardholders carry credit card debt, with nearly 1 in 3 Canadians not paying off their credit card at the end of every month. While 52% of those surveyed said they use their credit card to make the majority of their purchases, 32% don’t keep track of their credit card pruchases until they receive their credit card bill at the end of the month – inviting a surprise.
For those with credit card debt, several options are available to help reduce the burden. They can consolidate their debt on a lower interest loan, line of credit or balance transfer credit card. They can call their credit card issuer to see if their interest rate can be reduced. And, in all cases, those with credit card debt should try to pay more than their minimum payment due, and preferably pay their higher interest loans first.
To view the full results of the 2015 BMO Annual Debt Report, please click here.