Is Canada’s growing household debt a cause for alarm? TD
Bank Financial Group, CGA (Certified General Accountants Association of Canada)
and governor of Bank of Canada Mark Carney do feel that the rising indebtness
is disturbing. In fact, Carney also indicated that this issue may call for a
federal involvement keeping the current economy in mind.
According to a Vancouver
Sun report, TD estimates that the household debt relative to disposable
income may rise to 151% in the coming 5 years, taking into account a 2% yearly
economic growth and a 4% growth in personal income.
At the same time, TD also says that most Canadians
households will be able to manage debt. It makes this observation taking the
debt service ratio for mortgage payments (mortgage debt is the largest debt
that households have) into perspective. This ratio is what mortgage lenders
consider to determine borrowers’ repayment capacity.
A debt service ratio greater than 30% (i.e. mortgage
repayment in excess of 30% of the household income) is considered a worrying sign.
Bank of Canada, which uses 40% as vulnerability threshold, says that the
percentage of households in a financial tight-spot would increase from 6% in
2009 to 7.5% in 2013 if the interest rates see a 3.5% hike, as is expected. TD
also says that the percentage of households with debt service ratio between
30%-40% has increased to 9.3% from 7.2% two years ago. In the meantime,
Canadians will do well to take advantage of the low interest rate environment
to bring down unsecured debt or make payments towards mortgage principal.
