People have been badly hurt financially in the pandemic, but the overall numbers of debt defaults and insolvencies is lower than pre-pandemic levels. A quick example from data gathered by the Canadian Bankers Association: 0.2 per cent of mortgages were in arrears of the end of May, compared with 0.24 per cent at the end of 2019.
For some insights on how Canadians will manage their debts in the months ahead, let’s check in with Laurie Campbell, director of client financial wellness at licensed insolvency trustees Bromwich+Smith. Ms. Campbell has been one of my go-to sources on debt for ages. Here’s an edited transcript of a Q&A we did by e-mail recently:
Laurie, how many years have you been involved in helping people in debt?
I started in credit counselling 30 years ago when mortgage interest rates were in the double digits and the Canadian household debt-to-income ratio was about 60 per cent. Now mortgage interest rates are at 2 to 3 per cent and the debt-to-income ratio at the beginning of 2021 was over 170 per cent.
Aside from mortgages, borrowing levels in the pandemic have fallen and people have been paying down debts. What letter grade would you assign Canadians for their debt management over the past 18 months?
With discretionary spending reduced significantly, many Canadians took the opportunity to pay down their debt and grow their savings. They earned a B+ (or even an A) if they put a budget in place to keep borrowing low. Others took advantage of rising house prices and low interest rates to upgrade. If they haven’t planned for the inevitable increase in interest rates, they would receive a C.
Now, let’s look ahead. The economy is reopening, and early indications show people are eager to spend. What do you see ahead for nonmortgage debt?
The reopening means people going back to work, with more opportunities to spend. At Bromwich+Smith, we recently completed a survey showing that almost half of Canadians are eager to dine in a restaurant, which is great if it fits your budget. The risk is that people might overdo it and find themselves dealing with overwhelming debt. Well-saved dollars can be spent fairly quickly as opportunities to dine out, travel and shop continue to become more available.
As for mortgages, people buying houses today in communities across the country are taking on a heavy load as a result of high house prices. To what extent do you see high levels of mortgage debt contributing to financial stress in the years ahead, especially as interest rates rise?
That’s definitely a concern. When I first started in credit counselling in the early 90s, there were droves of people who found themselves in a market where they could no longer afford their homes. Many had to walk away from their homes. Interest rates are going to rise, and it may come soon. For Canadians in variable-rate mortgages, and even those who need to renegotiate, this could bring on significant financial stress. The way to avoid it is to build a budget that takes this into account and focus on how any interest rate increase could affect you.
You recently started working for Bromwich+Smith – how is demand for the firm’s services tracking compared with pre-pandemic levels, and what are you forecasting over the next 12 to 24 months?
When the lockdowns first hit Canada, our government was quick to support financially impacted Canadians with a wide variety of programs, many still in place. That caused the rate of insolvency to decline substantially and stay low. Those programs are going to end soon, which will mark the beginning of a return to pre-pandemic insolvency levels. We will see higher levels of bankruptcy and consumer proposals begin in the new year, if not sooner. And while creditors have been rightfully reluctant to collect on outstanding debt, we will see an increase in collections in the fall and new year.
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Rob’s personal finance reading list
More expensive mortgages are on the way
Mortgage rates were absurdly cheap in the pandemic. How much higher will they go over the next year or so? Here’s a look at forecasts from major financial institutions.
Silly things people say about investing
It’s easy to beat the market, why would anyone own bonds, and more. Good advice here from veteran investing writer Jonathan Clements.
Can home ownership make you a bad person?
A look at how being a homeowner can affect your thinking about building affordable housing and urban densification. Written from a U.S. perspective, but applicable anywhere a huge emphasis is put on home ownership.
Five myths about postsecondary scholarships
It could be easier than you think for a student to get scholarship money. For example, you don’t need to be a top student, have a low income or worry about massive competition.
Today’s financial tool
Statistics Canada created this infographic to help people understand how its consumer price index, the definitive measure of inflation, is put together. Worth a look to see the weightings given to things like food and shelter.
The money-free zone
The job interview humour in this TikTok video will have you laughing out loud.
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing … and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
