New statistics from the Canadian government and slower home sales across the country show average Canadians losing ground, and threatened by high debt loads.
The average Canadian household now earns only 63 cents for every dollar of debt--that's the highest ratio of debt to income recorded in Canada to date, and close to the levels seen in the United States before the housing market crashed in 2008.
While troubling, it also must be noted that Canadians on average have more equity in their homes than their American counterparts held before the market crashed. "With 70% equity, most Canadians are far better off than their Americans who had only 30% equity in their homes, on average, before the market melt down," says Canadian debt consolidation and credit expert Don Antle, President of Options Credit Canada.
New Mortgage Rules to Hit Hard
With that said, revisions to Canadian mortgage lending rules, along with the threat of rising interest rates, amount to a considerable threat to Canadians' ability to pay their debts in timely fashion.
In June, Ottawa capped CMHC-insured mortgage terms at 25 years, a drop from 30 years and the equivalent of a nearly one percentage point increase on a typical mortgage--an bump of $152 per month on a $300,000 mortgage, Antle says. In 2011 some 40 per cent of all mortgages in Canada were amortized over 30 years.
The reduction to 25 year maximum terms is the third time in three years the government has moved limits down, first from 40 years maximum to 35, then to 30, and now 25.
Recent numbers in the Canadian housing market indicate the new rules are having an impact. In September, Canadian home resales dropped 15 per cent over the same month a year earlier. Local markets such as Vancouver fell 32.5 per cent, and Toronto dropped 21 per cent.
While prices have generally not been effected yet, according to the most recent reports, it seems inevitable that a pull-back in home prices will become a reality soon.
More Opting for Debt Settlement
With less equity in their homes, and higher mortgage payments due to shorter amortization periods and higher interest rates, a greater number of Canadian households will certainly start to feel the squeeze.
According to a recent BMO Housing Confidence Report for 2012, 72 per cent of participants say they would feel significant strain from a small increase in mortgage payments, and 16 per cent say that a 10 percent increase in mortgage payments would mean they likely would be unable afford their home.
"Average Canadians are loaded with debt to the limit," says Antle. "We are now seeing a growing number of people reach out for help via debt settlements and debt consolidation."
Antle anticipates those numbers could accelerate.
Debt settlements have been gaining popularity as debt-strapped consumers have been turning to credit counselors and debt management agencies to negotiate cut-rate debt repayment by using the equity in their home to pay down high interest rate loans such as credit cards and department store cards, some of which carry annual interest rates of 30 per cent or more.
"If housing prices start to fall, those people will want to act more quickly to arrange for debt consolidation or debt settlement, while they still have substantial equity in their homes to draw on," Antle says.
Other options available to consumers who find themselves over their heads in debt include debt management programs and bankruptcy, the latter being the most severe course of action.
"In almost all cases credit counselors and debt management agencies can negotiate with lenders to get reductions in both interest and principal owing. Debt management programs typically get people out of debt and back to normal credit status within two to five years," says Antle. Bankruptcy, on the other hand, remains with an individual long term--for at least nine years, during which a person cannot get any credit whatsoever.
Rates to Rise
Bank of Canada rates are expected to rise starting summer 2013 at the earliest, and in the fall at the latest, according to most industry experts.
"Even a modest increase in mortgage rates will have a devastating effect on Canadian household debt," said Antle. "With 21 per cent of all adult Canadians, almost 5,000,000 families and consumers, already reporting their debt as unmanageable, any increases to mortgage rates alone are going to provide the tipping point."
Oliver Terrance writes about personal finance for Canadians. He covers investment, banking, home ownership, credit and debt management, among a number of topics related to Canadians and personal finance. Olliver helps individuals through his ongoing affiliation with leading Canadian debt consolidator, credit counsellor, and debt manager Options Credit. Options Credit is online at http://indebt1.com