Story of Interest
Written By: Maria Francis
Canada’s Household Debt Problem
Overview of the Debt Crisis
Ray Dalio founder of Bridgewater associates explains debt as a double-edged sword. Debt can be beneficial because it can be used to make advances in life such as perusing an education, buying a house or car, however some are negative such as living beyond your means. However, debt can only be good to a certain extent because it makes us vulnerable during financial downturns. If you take on more debt thank you can pay back, you will put yourself in credit risk because you may not to be able to pay back your loan. Today, Canadians now owe over $2 trillion in debt. During a potential financial crisis, it is likely that there will be high rates of unemployment and debt defaults which can also be affected by high-interest rates.
The Canadian debt level of $2 trillion is significant because it is 177% of disposable income. This means that for every dollar we make after taxes, the typical Canadian owes $1.77. More dramatically, 8% of Canadians owe 350% of their household income, meaning they owe $3.50 for every dollar they earn after tax. Both Toronto and Vancouver have a higher rate at $2 and $2.40 respectively, leaving them at a higher risk. This high level of debt is associated with high housing costs and cost of living. In comparison to other countries such as Sweden, Norway and Australia, Canadians have less household debt. It is noted that in Norway and Sweden, homeowners typically only make interest payments and the principle of the mortgage is passed on from generation to generation. As a result of increasing house prices, more Canadians have been taking on mortgages. 90% of Canadians below the age of 35 now have a mortgage and 46% of Canadians age 55-64 have a mortgage, significantly higher than 34% in 1999. New mortgage regulations such as stress testing is beneficial because it reduces the chance of potential defaults. There is however, a new issue of mortgage renewals after the stress test and higher interest rates.
On average Canadians owe $8,539.30 in consumer debt, while more drastically, 12% of Canadians owe above $25,000 and 14% owe between $24,999. Generation X age 35-54 feels the debt struggle the most because they have children to support and some have parents as well. Millennials carry $5,600 of debt on average. One main cause for our lower amount of debt is that we actively choose not to take it on because we actively want to avoid a debt cycle. Millennials put off buying a house because of unaffordability and outstanding student debt. However, collectively, 30% of Canadians don’t pay off their credit card balances each month which adds up to $7 billion in interest payments for the year.
The Student Struggle
Canadians owe over $28 billion in student loans. A typical Canadian takes between 9-15 years to pay off their loan. On average, a student owes $29,000 at graduation. These debt repayments usually coincide to the time when graduates consider buying a house or starting a family. As a result, the debt cycle continues through out their life.
Why Is This Important?
Many Canadians live in a paycheck to paycheck cycle and only a few have an emergency fund. Currently, 20% of Canadians don’t have any emergency savings and a quarter of Canadians have also admitted to being short on a bill at least once in the last year. This is a risk because if someone was unable to work, they would likely borrow more money for bills, miss interest and principle payments and potentially default on their loans.