Household Debt Continues to be a Risk

Many Canadians will not be able to make higher interest rate mortgage payments, writes Peter Watson.

Canadians’ personal finances are at risk because of high debt levels.

A recent report by Canada Mortgage and Housing Corporation sounded an alarm. Since 2010 Canada has had the most personal debt levels of all G-7 countries.

The UK and US had slightly less levels of personal debt. Updated information shows those two countries have reduced personal debt while Canadian debt levels continue to surge upward.

The reason for our high amount of borrowing has to do with one of the most concerning aspects of Canadian life: housing. Real estate mortgages account for 75% of all household debt.

The logic of people extending themselves to buy a house was a combination of extremely low interest rates and the rising cost of houses motivated buyers to purchase before prices increased further.

Regardless of what the motivation was that helped fuel rising house prices, the reality is mortgage payments must be made. Now in the current day environment interest rates are significantly higher.

Some people will be unable to continue making mortgage payments that have increased. Others that are financially stretched will not be able to handle any unexpected costs.

This predicament has the Bank of Canada concerned. The low interest rates of past years are never coming back.

A temporary solution to pay the bills is to rely on personal credit cards. That just aggravates the problem because of the exorbitant high interest rates when a card balance is not paid off in a timely manner.

Unfortunately, current levels of debt combined with higher interest rates mean that many households will be in serious financial jeopardy.

If this applies to you, our recommendation is to start developing personal financial strategies that hopefully protect your long-term financial health.

Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com