Canadians can’t count on a central bank bailout for consumer debtOct 21, 2015
In a speech in Washington last week, Stephen Poloz, Governor of the Bank of Canada (BoC), said it’s not in his job description to “protect individuals from making bad choices.” But with the BoC lowering interest rates twice this year to encourage business borrowing, consumers have also been taking advantage of this opportunity to add to their debt loads—pushing the household debt-to-income ratio to a record 164.6%.
Poloz’s predecessor, Mark Carney, had warned that he might raise interest rates in response to rising household debt. But the current governor, while acknowledging the “key risk” of rising debt levels, says that Canadians need to “better understand the important decisions they make” and that we need to improve financial literacy in this country.
Certainly, there’s no denying the need for financial literacy education in schools, but there are plenty of older Canadians who have already made many important decisions—and they weren’t necessarily bad choices. Generation X, which came of age in the late 80s and early 90s, now finds itself entering middle age, with its oldest members in their 50s. This generation faces some unique challenges, dealing with thehighest delinquency rate in the country—while caring for both their parents and their children.
This so-called “sandwich generation” is finding itself squeezed at both ends; 55 per cent care for children, aging relatives, or both. As a result, 76 per cent of them feel that the stress of everyday living is preventing them from meeting long-term financial goals. For Gen X, many important decisions, like getting an education, advancing in their career and buying their first home were made without relying on others—but now they find themselves in the position of financially supporting the rest of their families.
This condition even has a name: Generation Squeeze. Adult, working-age Canadians are finding themselves squeezed for time at home as they work longer hours while squeezing in higher levels of education in the hopes of finding better employment. And with the rising cost of housing, Canadians need to take on much more debt to buy a house than they did a generation ago. Education, housing and caring for loved ones aren’t bad choices; rather, they’re basic requirements of living.
That said, the BoC decided not to raise interest rates this week, which could have encouraged Canadians to stop spending. The low rates do make payments more affordable for Canadians dealing with consumer debt, mortgages and student loans while facing high housing costs and looking after loved ones. But it’s time tostress test your debt to see what might happen when rates eventually rise. Will you still be able to service your debts at higher interest rates? When it comes to making mortgage payments, several Canadians have said they’d struggle to afford an increase.
As we head toward the end of the year, now’s the time to review your annual budget and see if you’re able to take additional steps to pay down debt before interest rates increase.
How are you coping with the cost of living? Share your thoughts with BDO by joining the conversation on Twitter using #LetsTalkDebt #BDOdebtrelief