With continuing economic problems and moribund growth south of the border weighing heavily on Canada’s economic outlook, measures to cut household debt levels – through debt consolidation, mortgage refinancing and reigning in spending – are of increasing importance to savvy Canadian homeowners.
Bank of Canada Governor, Mark Carney has said he is “concerned” about such high levels of household debt, which stand at a record high debt-to-income level of 146 per cent, due in no small measure, to the Bank of Canada’s own abnormally low lending rate. Canada’s central bank (along with the central banks of virtually all developed nations) was forced to radically slash its overnight lending rate to banks in response to the financial crises of 2008 and 2009. Now, however, with the Canadian economy recovering nicely from the recent recession, the Bank of Canada has been forced to pause in its course of increasing its lending rate to normalized levels so that Canadian rates do not overly diverge from the U.S. Federal Reserve rate.
“The relentless rise in household debt in Canada, both in absolute terms and relative to personal disposable income (PDI), is a growing cause for concern,” note economists from TD Bank Financial Group. In a recent report, they note that Canadian debt as a share of PDI has nearly tripled (“from 50% to 146%”) since the mid-1980s, with “a visible acceleration in the long-term trend of debt accumulation (that) has taken root since 2007.”
The economists at TD Bank are not concerned that these current debt loads will trigger a U.S. style deleveraging of household debt (featuring housing price drops, foreclosure spikes, and the rapid drop in consumer demand that continues to slow U.S. recovery), however they do caution that the growth in personal debt must slow relative to income growth over the coming years or else the risks of (such) a future deleveraging will increase.”
Fortunately, there are a variety strategies that prudent Canadian homeowners can take to reduce overall debt, including refinancing an existing mortgage to lock in today’s low mortgage rates that will inevitably rise in the medium term, or consolidating outstanding consumer debt under a lower interest home equity line of credit. A well-resourced mortgage broker can help homeowners access a variety of products to help homeowners reduce their debt exposure.
