Understanding Consumer Household Debt

Date: Friday, May 18th, 2012

By Rubina Ahmed-Haq

After years of hearing how Canadian consumer household debt is spiralling out of control the message seems to be getting through.

A recent report on consumer credit by CIBC finds consumer debt in Canada declined in March 2012. It also found overall consumer debt levels are rising at the slowest pace since 1993. Even better news, fewer Canadians are behind on their mortgage payments. The mortgage arrears rate tracks those behind on their mortgage payments. It’s falling, and is currently at a rate of 0.4 per cent down from 0.5 per cent during the recession.

“Soft credit card activity is largely behind the softening in overall growth in consumer credit,” says CIBC economist Benjamin Tal. He adds in a recent report, “for the first time in more than a decade, consumer credit in Canada is rising more slowly then in the U.S.”

Lawrence Kobescak of Ontario Mortgage Superstore says new borrowing rules are also helping Canadians, “CMHC in 2011 reduced the maximum a borrower can refinance their home to 85% LTV.  Lines of Credit are capped at 80% LTV.  Both of these moves will help protect CMHC from default in the event the housing market collapses,” he says.

This change in attitude is only the first step. Canadian household debt levels still remain at near record highs at 151 percent. This means Canadian owe $1.51 for every dollar they earn.  But does this mean Canadians household debt is out of control? And how does your debt fit into the overall consumer debt picture.

There are many ways to measure debt here are some commonly used ratios.

Monthly debt to income ratio

These are your fixed monthly cost compared to your monthly income.

Debt to income ratio

This is the calculation Statistics Canada uses to come up with that scary 151 per cent figure. It’s your total debts compared to your total household earnings after taxes

Debt to asset ratio

This is all your debt outstanding compared to your assets.

Lawrence Kobescak says regardless of what ratio you use you have to put your debt into perspective. “While the concern by the Bank of Canada over the debt to household income rising to over 151% is warranted, I feel it is misdirected. While borrowers are restricted from taking too much equity out of their homes nothing is stopping the banks and credit card companies from issuing excessive amounts of unsecured debt.”

It is this high interest debt that can affect person’s finances. “While CMHC’s changes may avoid a CMHC default, it is doing nothing to stop Canadians from getting in over their heads. I find most clients looking to refinance are trying to consolidate existing high interest debt rather then to take equity out to do additional spending.”

The message from the Bank of Canada is Canadians should prepare themselves for higher interest rates in the months to come. Consumer debt can stay under control by borrowing intelligently and having a plan to pay it off. If the CIBC report is a true reflection of Canadian attitudes then the country is already heeding that message.

Rubina Ahmed-Haq

Rubina Ahmed-Haq

Rubina is a finance writer whose career spans three continents in TV, radio, print and online. She is a resident finance expert on CBC's Steven and Chris . A regular contributor to The Toronto Star’s Moneyville.ca, finance editor at Homes Publishing in Toronto and writes a monthly column for Mississauga Life Magazine. As a business reporter she has worked for CP24 from the Toronto Stock Exchange and reported for BNN. Before becoming a business reporter, she worked as an anchor and reporter at CBC, BBC and ABC in Canada, England and Pakistan. Her personal blog is www.alwayssavemoney.ca.

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