Are Concerns About Canadians’ Household Debt Overblown?

Concerns about Canada’s $2 trillion in household debt overblown” screams the headline of the Fraser Institute’s latest press release. Although Canada’s household debt has increased from $357 billion in 1990 to $2 trillion last year, the think-tank notes that our net worth has also risen substantially to a total of $10.3 trillion, five times our household debt level.

Both these numbers might be too big for the average Canadian to relate to—how much is a trillion dollars, anyway? The Fraser Institute argues that because the value of what we own is so much greater than what we owe, Canadian citizens do not have a debt problem. Here are a few key stats from their report:

  • Mortgage debt makes up two-thirds of Canadian household debt
  • Credit card debt and consumer credit accounts for 30 per cent of household debt
  • The value of Canadian household assets (real estate, investments, pensions) increased from $2.2 trillion in 1990 to $12.3 trillion in 2016
  • Subtracting the total Canadian household debt ($2 trillion) from Canadian household assets ($12.3 trillion) shows that Canadians’ overall net worth is $10.3 trillion


Here’s what the Fraser Institute overlooks

The Fraser study’s main point is that, as opposed to its citizens, Canadian governments have a negative net worth—the amount they owe is greater than the assets they own. But while having a positive net worth can help you avoid bankruptcy, most people probably wouldn’t sell a car or their home in order to pay off their debts in most circumstances.

Even if your total debt load is less than the value of your home, debt can still become unmanageable if you’re unable to make all your monthly payments. Having a high net worth does not always prevent debt problems.

Whether it’s good debt or bad debt, you need to pay it off

Good debt is any form of debt that increases your net worth. A mortgage or student loan falls under this category. These debts also tend to have lower interest rates than credit cards, payday loans or some lines of credit. A bad debt decreases in value over time—like a car loan, or any item bought with a store credit card.

But even if the value of your home rises, and increases your net worth, you can’t exactly tap into the value of your home to pay off debt. Sure, you might be able to take out a home equity line of credit (HELOC), but that will not eliminate your debt. It simply transfers your balance to a loan with a lower interest rate. In order to reduce debt, you will need to make payments on your HELOC, above and beyond the interest that is charged each month.

While good debt is better than bad debt, they both need to be paid off. #DebtSolutions Click To Tweet

Pay off debt before rates rise again

It’s a safe bet that the Fraser Institute waited to release this study until after the Bank of Canada announced its first interest rate increase in seven years. After all, this rate rise really put household debt in the spotlight last week. But an interest rate increase is usually not a one-off thing. We can expect rates to rise again in the near future, perhaps as soon as two or three months from now.

And mortgage debt is usually the most affected by any interest rate increase. As discussed last week, only variable-rate mortgages will rise right away. But in a rising-rate environment, your mortgage rate is likely to be higher upon renewal…unless you pay off the balance by the end of your current mortgage term.

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