Interest rates aren’t decreasing—what about your debt?Sep 15, 2015
Canada officially entered a technical recession this month after two straight quarters of declining GDP. This news didn’t lead the Bank of Canada to cut interest rates; the benchmark rate remains at 0.5 per cent. Still, even without an additional cut, interest rates are near all-time lows. Canadian debt levels, on the other hand, are actually at a record high. It is not surprising that Canadians view current interest rates as an opportunity to take on additional low-cost debt. However, record-low interest rates also present Canadians with another opportunity: the opportunity to pay down debt.
One of the goals of lowering interest rates was to stimulate consumer spending—and it seems to be working. In the second quarter, consumer spending rose 2.3 per cent, as mortgages and other loans accounted for a higher percentage of Canadians’ spending. Canadians have taken advantage of these lower rates to increase their personal debt levels to an average of $93,000—but with rates not expected to rise until next year at the earliest, Canadians are presented with somewhat of a grace period, allowing them time to pay down their debts at lower rates.
The question is, why are so many Canadians continuing to add to their debt rather than paying it off? Several Canadians spent more this summer, with 29 per cent increasing their debt since May. And 46 per cent said they would increase their debt in the coming year. Technical recession or not, the message that the economy is in decline doesn’t seem to be sinking in with many individuals.
Although the national recession might be considered “mild” by some economists, the news is much worse in some parts of the country. Only 21 per cent of Albertans are optimistic about their province’s economy—a number that dropped 20 percentage points since May. The Alberta government is expected to run a $5.88 billion deficit this year, and up to 185,000 oil-and-gas workers could lose their jobs. As Calgary pawn shops are overloaded with luxury goods, neighbouring Saskatchewan is also predicting a $292-million deficit due to low oil prices and forest fires. In these western provinces, personal debt problems could potentially get worse.
Fortunately, there are other options for dealing with debt than visiting a pawn shop. An increasing number of Canadians are considering a consumer proposal, which freezes interest charges, protects assets and allows you to pay back all your creditors. In June, a total of 10,463 Canadians either declared bankruptcy or accepted a consumer proposal to pay down debt. Overall, insolvency in Canada increased 1.7 per cent for the year ended June 30 from the previous year.
Not all Canadians dealing with debt problems will need to choose a consumer proposal or file for bankruptcy. But for those who’ve increased their debt over the summer, or have taken advantage of the two interest rate cuts this year to purchase a house or take on a car loan, now is the time to start paying down debt. When interest rates rise, Canadians’ debt payments will need to increase just to keep up. Will your budget be able to cope with the added debt pressure?
Are you taking advantage of lowered interest rates to pay down debt? Share your thoughts with BDO by joining the conversation on Twitter using #LetsTalkDebt #BDOdebtrelief