By Garry Marr, Financial Post, February 10, 2014 - If Canadians don’t seem too worried about paying down debt, it may have something to do with the reality that at today’s interest rates it’s easy to carry their loans. A new survey shows debt levels are climbing fast, to a record $1.422-trillion in the fourth quarter of 2014, according to credit agency Equifax Canada.
While the agency says Canadians can handle the debt for now, it also says the current level should not be dismissed even though delinquencies are at an all-time low with only 1.12% of Canadians in arrears for more than three months.
Just one quarter ago, Canadians had $1.36-trillion in debt, bumping up their debt by 4.5% from the third quarter of 2013.
It raises the question of whether consumers are merely paying the minimum payments on their debt to avoid delinquent accounts, racking up a larger credit burden.
“Usually it goes downhill from there where people eventually can’t even make minimum payments as the interest creeps higher and higher. A vicious cycle,” said Laurie Campbell, executive director of Credit Canada.
Regina Malina, director of modeling and analytics with Equifax Canada, said it really depends on the household when it comes to where they fit in handling their debt.
“Some people are making minimum payments, some people are making more,” said Ms. Malina. “The key question is whether there is a tipping point in all of this.”
Installment loans, largely made up of car loans, were the fastest growing segment of debt, up 11% year over year. Credit card debt rose 5.9% from a year ago.
Ms. Malina says an optimistic economic outlook with job growth and strong consumer confidence, along with low interest rates, are key considerations on how we view current debt levels.
“From my perspective if the situation continues as it has been and all the economic parameters stay in place, the outlook is positive,” said Ms. Malina. “If some [of the risks] are raised then we do reach that tipping point.”
Even those who say we can handle the load, concede the record level is hard to ignore.
“It’s a number that seems to defy gravity. Debt service ratios, however, are stable indicating that most households have adequate income to service their debts,” said Cristian deRitis, senior director of consumer credit economics at Moody’s Analytics. “Interest rates are expected to remain relatively low throughout 2014, rising gradually in 2015 and 2016 as both the Canadian and U.S. economies gather steam. This transition period should allow consumers to adjust their spending habits while continuing to make their debt payments.”
Doug Porter, chief economist with Bank of Montreal, said the build up in debt is directly linked to a deep, long decline in interest rates.
Most consumers borrowing at prime continue to pay 3% and the rate is tied to the Bank of Canada’s overnight lending rate which hasn’t moved in about three years. Mortgage rates for anyone locking in for five years have hovered near 3% for almost two years and are heading back below that magical level.
Rates for auto loans, the fastest growing segment of credit, also continue to trend lower with car companies offering cut rate deals.
“We are stretching out debt on cars loans. Eight years used to be the exception but it’s becoming the norm,” said Mr. Porter.
Still, the economist doesn’t see much to panic about when it comes to debt and notes that carrying costs as a portion of disposable income are declining based on interest rates.
“I think there is some vulnerability,” said Mr. Porter, about the potential of higher rates. “But there is no clear and present danger.”
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