Gas Goes Down, Debt Goes Up
Apparently you can’t win. Gas prices go down, saving consumers money, but then the commodity-based Canadian economy is hurt by the shortfall in oil revenues, shown in the dropping loonie. You’ll have more money to spend on you next trip to Buffalo but it won’t go as far as before.
While less costly fill-ups are leaving us with more cash, it’s not staying in our pockets as Canadians take on unprecedented levels of debt.
According to a Financial Post article, the loss of oil revenues will hurt the housing market, which already saddled with “near-record levels of household leverage. . . . Canada’s ratio of household debt to disposable income rose to a record 162.6% between July and September, according to data released last month. Benchmark interest rates of 1% have fanned a house-buying frenzy that sent 2014 sales up 6.7% in Toronto and 16% in Vancouver.”
Then a Globe and Mail article points out: “Oil prices may be crashing and sparking fears of an economic downturn, but Canadian households continue to have few qualms about piling on debt. . . . Household credit grew by an annualized rate of 4.5% in November, a two-year high and the second month of strong gains, to top $1.8-trillion.”
Residential mortgage debt had the biggest jump, leaping 5.2% in November from the same month a year before. Other forms of credit, including credit cards, lines of credit and loans, grew by 3%.
Canadians have been able to service their high debt levels because of relatively low interest rates. But if the country’s unstable economic conditions lead to a spike in interest rates, then the load might become unbearable for many, leading to bankruptcies and other credit problems.
If you have any doubts about your own situation call Richard Killen & Associates and we’ll set up a free consultation to assess everything and review all your options. It is usually a good idea to get ahead of any potential problems that may lie just over the horizon.
How Much Debt is too Much Debt?
Canadians like their stuff. They’re not afraid to go into debt for their new cars, homes, large-screen TVs and other items, big ticket and small. As a result, many of us owe way too much.
Moody’s, one of the world’s leading credit agencies, recently gave Canada an AAA rating for its “relatively solid economic performance” and stable banking system. But at the same time it warns that the country’s high household debt levels and soaring house prices pose “a potential risk” to those strengths.
Even though debt isn’t usually a good thing, sometimes it can be justified. Rather than simply buying something we can’t afford, debt can be a shrewd way to get ahead if you’re reasonably sure that you will have the means to pay it off.
For example, a graduating lawyer expecting to make $250,000 could probably take on a mortgage and expect to pay it off in a decade, where someone freelancing in a shakier industry might find themselves on the road to financial disaster owing this much money.
So how much debt is too much?
A recent Financial Post article reports:
Statistics Canada says that the average level of household credit market debt to disposable income was 163.6% between April and June. That means we owe almost $1.64 for every $1 that we make. . . . Economists have said that a more stable ratio would be between 110% and 120%. The ratio was closer to those figures in the early 2000s when the economy was on firmer ground, says Cris deRitis, senior director at Moody’s Analytics.
From the bank’s point of view, when you total your monthly debt payments along with heating and taxes for your house, this number should not exceed 40% of your income. Lenders call this the Total Debt Servicing Ratio (TDSR). If you exceed this ratio, then you will have a hard time borrowing money.
When you make out a budget, you can figure out what minimal amount you need to support your lifestyle. Once you know this number, you can figure out how much money you can put towards your debts. If you don’t have enough money left over to pay these, then your debt level is too high.
And keep in mind that the bank doesn’t know this number when they offer you more credit. Just because you’re eligible for increased credit doesn’t mean you can afford it.
Generally speaking, if you’re worried that your debt level is too high, it probably is. The fastest way of all to measure this the 50% rule. If more than 50% of your income is going to servicing your debt load, your debt is too high. No question about it.
So in the end, if you’re having trouble servicing your debts and would like some help in assessing your prospects and options for dealing with the problem, call us at Richard Killen & Associates. We can help you sort it out and the consultation is free.