CommunityLend blog

CGA Canada produced their 2010 report Canadians debts. Most of us quietly assess ourselves against others and against the average as one way to judge success in achieving our financial goals.  This report provides a window into the financial lives of Canadians and it is freely available.

Credit (excluding mortgages) all through the last three years has been increasing and at much higher rates than the US.

Drilling deeper we see that 77% of this debt is in loan products with floating (Line of Credit) or high rates (credit cards) and therefore essentially no amortization.  We know that if the minimum payment is regularly made on those products they will take over 30 years to repay in full, no matter the amount outstanding.  This is hardly a recipe for reducing debt.

The CGA worry about three future risks for Canadians.

1. Decline in income

2. Asset price shock

3. interest rate shock

At CommunityLend we want to help in any way we can with transparent prices and products designed to reduce debt while also providing some protection from the risks mentioned in this report.

Technorati Tags: Canada,consumers,debt,consumer loans,fixed rate,pay down,reduce debt,financial plan,personal loan,loan,asset price shock,interest rate shock,interest rate hike

Good wake up piece here indicating the relative appetite for credit and in particular credit card and unsecured lines of credit in Canada vs the US.  Not sure the numbers sound completely right, but the indication is that Canadians have relatively much more unsecured debt that Americans, and that might come as a surprise to most Canadians. 

The article goes on to draw out the distinctions between passive saving while the stock market was rising, versus the current situation, whereby saving must come from monthly income – old fashioned saving as the CIBC economist calls it.

Plastic Nation: Canadians Drowning in Credit Card Debt | Epoch Times

“People have put themselves in this situation where they’ve got cars on lease or on loan, they have a huge mortgage on their homes and they may have $30,000 to $40,000 on lines of credit and unsecured debts such as credit cards and that’s just not sustainable.”

…

CIBC senior economist Benjamin Tal says savings rates went down because net rates went up. In recent years people were making a lot of money in the stock market and in the housing market, he explains, and this was their way of “passively saving.”

“But beyond that, now with the housing market levelling off we will see a situation in which people will go back to old fashioned saving, especially in an economic slowdown,” Tal predicts.

Credit card debt turns into a never ending treadmill for many in Canada, and this piece at Citynews.ca summarises the scale of the issue well. Some who have the home equity, turn the debt into a mortgage, although, while that reduces the payments, that simply converts the debt into a 25 year loan.

The article speaks about the opportunity to bring the debt down with a little discipline. Helping out in this area is a key focus for CommunityLend.

CityNews: Debt A Reality For Many Baby Boomers

About a quarter of Canadians carry $10,000 to $40,000 in credit card debt, and personal bankruptcies have increased 24 per cent in one year.

Rob Carrick over at the Globe & Mail pulls together a clear consumer piece on the coming convergence of inflation, rising interest rates, and holding too much consumer debt.

reportonbusiness.com: Inflation’s rising, so pay down debt now

The most important financial move you can make in the next six months is to get your debts under control.

Pay off your credit cards, pay down your line of credit, and if you’re buying a home, don’t max out on your mortgage payments. Tough times are coming and the people who get through them in the best shape will be the ones who aren’t siphoning a lot of their household income to pay off debt.

His article brings together comments from industry analysts who are looking out to 2009/2010, and he notes their analysis which looks at the financial moves made by governments and consumers today, and predicts what impact that will have as the lag effect comes in to play.

Things he suggests to watch for are higher inflation of 3 – 4 % by 2009/10 (predicted by CIBC World Markets) rising interest rates – no prediction here, but will risk apparently as a result of higher interest rates.

Carrick continues:

There are warnings of financial stress to come, though. Interest paid on mortgages and other forms of consumer debt has been soaking up an increasing proportion of household cash flow. Until recently, this didn’t seem to be much of a problem because personal wealth was rising faster than debt. But with falling stock markets and a slower pace of growth in home prices, debt has been growing faster than the value of household assets.

He finishes off the piece with recognition that some debt is unavoidable, and that the trick is to keep it manageable. He offers some guidelines, based on discussions with some lenders, and throws in the thought of using that income tax refund (tomorrow is the deadline) for paying down debt.

Lenders figure you’re carrying too much debt if your monthly housing costs, including mortgage payments, property taxes and heating, plus all your other monthly debt payments eat up more than 40 per cent of your gross monthly income. Housing costs alone are supposed to account for no more than 32 per cent of your gross monthly income