55 – Canada’s Economy and Household Debt: How Much Is Too Much Debt?

Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay, and in today’s show, we’re going to talk about the economy in Canada and household debt. How much debt is too much? We’re going to find out what the average Canadians household debt levels are. How do you know you’re in debt trouble?

We’re going to find out about your debt to income ratio and what that means. We’re going to talk about how this looks and compares to just a few years ago and what happens if things get worse. 

My guest today is Leigh Taylor from LCTaylor, Licensed Insolvency Trustee in Winnipeg and Kenora. Thanks for being here, Leigh.

Leigh Taylor 00:46
Hi, Wayne. How are you?

Wayne Kay 00:47
I’m doing great, thank you. How are you doing?

Leigh Taylor 00:49
Pretty darn good.

Wayne Kay 00:50
I’m excited because we’re going to be talking about the economy of Canada. We’re going to talk about debt. And are we, as Canadians, falling deeper and deeper into debt?

Leigh Taylor 01:01
Well, I think the answer to that is yes, with a few little asterisks beside it.

Wayne Kay 01:07
Okay.

Leigh Taylor 01:08
Part of it is we’ve just come through, we’re almost all the way through this COVID epidemic now, and that’s created a lot of pretty unique problems that I’d say none of us have ever faced before. So parts of the economy are doing well because they’re recovering while other parts remain to be seen.

Wayne Kay 01:27
You know, it’s interesting as you look at Canada’s economy. We have many companies with record profits, as we’ve seen prices skyrocket, but then you have on the other side. So there’s this major increase in wealth. But also on the flip side, we’re seeing more people struggling day to day.

Leigh Taylor 01:49
I think if you owned a hand sanitizer or N 95 mask company, you’re rolling in dough. If you worked in a restaurant and were laid off for a year and a half, not so much.

Wayne Kay 02:02
So right. When we talk about our country’s economy, how are you feeling about it at this point? You think we’re doing all right?

Leigh Taylor 02:13
Considering all the variables, I think we’re going to be recovering, but I think the recovery may be a little slower than most people would hope for.

Wayne Kay 02:19
Okay. And what about the average household debt level? What is that all about? What are you thinking? What do you see when it comes to that?

Leigh Taylor 02:27
Well, there’s statistics on debt to income ratio, which is an interesting statistic to take a look at. It’s been going up just about every year for the last while, since I can remember. In the sixties, maybe when it started.

It did take a slight dip last year and went down a little bit, but not a significant amount. And it’s basically the ratio between how much debt the average household owes compared to what the average household income is. And if you go back to, I don’t know, 1980, for example, you were looking at, it was around 66%. If you look at it today, it’s about 183%. So it’s much higher.

And in some ways that’s a danger signal because it means that it costs that much more to service your debt. And if it costs more to service your debt, that leaves less leftover for standard of living kind of expenses.

Wayne Kay 03:26
Right. But I’m following along with what’s going on in the economy and I don’t think I’ve ever seen vehicles priced as high as they are. And obviously gasoline is super high. And it seems like I’m seeing more $70,000 new vehicles on the road than I’ve ever seen before. 

I have a friend who’s actually in finance at a car dealership and he said the average person spends about $86,000 and finances for eight years. You could buy a house in 1980. Right?

Leigh Taylor 04:01
Yes, that’s true. Well, part of that is because of inflation. The government poured a whole lot of money into people’s pockets, subsidizing them for being away from work, enhancing unemployment insurance –  just plain writing them cheques.

The result of that is that one could criticize it from the government’s perspective, except that there’s an awful lot of people that got some much needed funds to help them survive some really tough COVID times.

Wayne Kay 04:33
Right.

Leigh Taylor 04:34
But they’re going to be paying the price for it with inflation because if you subsidize that much, then everybody’s going to up their prices to take advantage of everybody having more money. They try to make up for lost time when they themselves are having a tough time through COVID. So inflation is a real nasty part of this. It’s the price you pay for all the help the government gave you.

Wayne Kay 05:01
Is there anything we as common people could do regarding the income ratio, the debt to income ratio?

Leigh Taylor 05:07
Well, a lot of things depend on your particular circumstances because the debt ratio doesn’t include your household mortgage but includes all your other debts. And there’s a difference between – let’s say you went out and spent $20,000 on a humdinger vacation to Hawaii and you came back with a $20,000 debt as opposed to you spent $20,000 on a car. Now you’ve got $20,000 debt but you got a car. Worse comes to worst, if you can’t keep up the payments, you can always sell the car and reduce your liability. So there’s a difference. Not all debt ratios are the same.

Debt ratios aren’t so bad and they haven’t been so bad for the last number of years because we’ve had record low interest rates. If you’re carrying $20,000 with the debt at 4% as opposed to $20,000 at 2%, there’s a big difference in how you service that debt. All of them are the same. 

But if you suddenly go from 2% or 3% up to 5%, suddenly the cost of servicing the same debt is considerably higher. And that puts pressure on your income because the ratio is the same, but the result is considerably different. So a debt to income ratio is good for looking at the entire population, but you’ve got to be careful when you apply it to individual situations.

Wayne Kay 06:37
I didn’t realize that it actually didn’t include mortgages.

Leigh Taylor 06:41
Yes. Otherwise, because I think about 70% of the population have mortgages. And your mortgage, the average price of a house in Winnipeg is probably about $300,000 – $350,000.

That would up the statistic considerably. So they’ve taken that out of it. They’re talking about credit card debts and bank loans and lines of credit and that sort of thing.

Wayne Kay 07:05
Right. Wow. $300,000 to $350,000. You don’t want to say that too loud. The rest of the country is going to move there. I can’t buy a shed in BC for $300,000.

Leigh Taylor 07:18
Winnipeg is a wonderful place to raise your family and pay off your house, I’ve heard.

Wayne Kay 07:22
Okay. So we’re just talking about regular consumer debt. So that means if you make $50,000, does that mean that at 170% you’re in debt by $70,000?

Leigh Taylor 07:38
Yes, you’re probably about $75,000 in debt on the average.

Wayne Kay 07:43
Okay, well that’s interesting.

Leigh Taylor 07:45
And it depends on demographics as well. You’ll find that younger people in their 20’s and 30’s probably have a higher debt ratio because they’re borrowing more money. They have young families and that sort of thing, trying to raise a family. Your wife isn’t working because she’s off on taking care of the kids and these sorts of things. 

As you get older, generally speaking, you end up with, if you bought a house, you probably have a little more equity in your house. You’ve probably got a lot of the costs of kids and these sorts of things paid off a little bit. And if you’ve been careful with your money, you’ve saved a few dollars as well. So the debt ratio is a little different.

There’s a lot of variables that go into analyzing whether your debt ratio is too high. I guess the key is taking a look at your individual situation and looking at debt servicing. Can you service the debt that you’ve got and have enough money left over for a reasonable standard of living? If the answer is yes, then you’re probably doing okay. It’d be nice to save a few bucks, but as long as you’re getting further in debt, you’re servicing the debt.

If, on the other hand, you find that you can’t quite pay your credit cards off or at least pay anything more than the interest that’s due on them, and you have to sort of rob Peter to pay Paul and cut out various expenses in order to pay the rent, you’re probably too far in the hole right now. 

So debt servicing becomes sort of the individual key. If you’re looking at this and say, well, okay, my debt ratio is 162%, is that too high or not? Part of the question then becomes, are you able to pay your bills and still maintain a reasonable standard of living.

You had asked earlier – what can you do about it? Well, there’s other things, not a lot of other things. One, you can either reduce the debt and you could do that sometimes with, let’s say, consolidation loans. You can increase the mortgage on your house, get a second mortgage at a lower interest rate, and that can help considerably get another job.

A lot of people are working part time jobs and there’s a real call for that because unemployment is very good right now. There’s all sorts of restaurants looking for staff and these sorts of things. So a part time job and evenings and weekends would certainly reduce the ratio considerably. 

And just trying to do very good budgeting so that you can live within that ratio because you reduce the frivolous things that are part of your standard of living. Maybe you cut out your $4 a day to Starbucks and save yourself $100 a month, those sorts of things.

Wayne Kay 10:30
When you go in, let’s say you’re going to buy a house. They must obviously look at this household debt and how you’re doing before they will approve you. Let’s say you’re a new person going into buying a home.

Leigh Taylor 10:45
Yes, most homes these days, unless you put a lot of money down, are going to be CMHC approved mortgages, so they’re insured, et cetera. And CMHC has various statistics and arrangements that they can make to say, well, you shouldn’t be spending more than 35% of your net income on housing. So they’ll work that out.

Considering that they finance hundreds of thousands of houses every year, having a nice broad statistical approach to it is probably good. But the individual has to look at it themselves and say, well, what can I afford realistically? And maybe buying the biggest house that you can afford isn’t necessarily the best idea. 

You might really want to get into thinking, well, what are my basic needs? And if I’m not in the housing market now, maybe buying a smaller home so that I can make sure that I can handle it and then building up equity and moving up later on is the way to go.

Wayne Kay 11:48
So let’s talk a little bit more about if all of a sudden you’re doing okay, but you do have that high debt – you talked about a consolidation loan. That is one option and then of course the other option. Let’s say things go sideways where you are unable to make these payments anymore, what are the other options?

Leigh Taylor 12:10
Well, when things get bad, you should seek professional help about it. It’s sad that we don’t teach a lot of debt management in high school or whatever because they just don’t bother. So people oftentimes have to learn the hard way.

Getting help with budgeting is a good thing to do. Certainly talking to someone like a Licensed Insolvency Trustee such as LCTaylor is a good idea as well because we can certainly give you an idea of what direction you should be going in. 

Is a consolidation loan going to help? Well, if you have a couple of hundred thousand dollars equity in your house and you’ve got $70,000 worth of credit card debt, you can probably get a second mortgage at what a second mortgage is running now 5%, 6%.

And that’ll be a whole lot better than the 18% or 22% that you’re paying on your credit cards. And that makes sense. Just taking several credit card debts and rolling them into one debt doesn’t really help you unless you have some sort of collateral that would justify reducing the interest rate that’s being charged on that. Otherwise you’re not really saving yourself any money, you’re just writing the less cheques.

Wayne Kay 13:23
Here’s a question: if you are having some credit card issues, has it ever happened where somebody has contacted the credit card company and said, I can’t do this 21%, where they’ll drop it down to 10%? Or is that unheard of?

Leigh Taylor 13:39
In theory it’s a plan, but it’s almost unheard of. And part of the problem is –  you take Visa, for example. There’s about 13 million Visa cards out there and there isn’t a Visa customer that wouldn’t like a lower percentage rate and doesn’t feel sort of hard pressed when they can’t pay their bill off at the end of the month. So if Visa starts setting the precedent by merely asking for it – they do it. They just can’t afford to do it.

Wayne Kay 14:09
I’m sure they could scrape by. It’s shocking, it’s criminal.

Leigh Taylor 14:15
In fairness to them though, they have responsibility to shareholders and their shareholders want return on their investment, right? That’s what they’re in business for. So that’s the capitalist system. 

If you get yourself in trouble. Well, there’s other ways to get yourself out of trouble. During COVID, there were a lot of creditors that gave a lot of breaks to their clients, in fairness, because they knew that they were out of work, that there were going to be all sorts of problems. They’ve allowed people to put their monthly payments on hold for two or three months, these sorts of things, to see if they can get back on their feet.

I know that when we file proposals with creditors, creditors seem to be a lot more available to discuss through a formal proposal. For example, if they would take so many cents on the dollar. Some creditors were a little reluctant to agree to proposals unless they’re really good proposals. And they’ve let more go by because they know that there’s a lot of people out hurting. And the fact that they’re willing to try to do the best that they can is a good sign and should be recognized by the creditors.

Wayne Kay 15:23
Well, that’s great news. I mean, you deal with them all the time so that is definitely going in the right direction. 

Well, I think we covered a lot of information here. Any final words you want to share regarding household debts and our country’s economy?

Leigh Taylor 15:37
No, other than it’s all well and good to look at the country’s economy, but you have to look at your economy first. You got to decide whether you’re above water or not on this thing.

Can I afford to support myself and my family and still pay my bills? And if the answer is I’m not sure, then you better seek some professional help. There’s obviously more solutions available the sooner you face the problem. So if you are not sure or you don’t think you’re able to pay these bills, talk to us. Talk to a Licensed Insolvency Trustee wherever you are.

And if you’re in Manitoba, LCTaylor. We can certainly tell you where you are keeping an objective view, tell you what your options are. And if you look at it early enough, you’re bound to have more options.

Wayne Kay 16:25
Yes, and it’s a free consultation with LCTaylor. They can reach out to you through the website. LCTaylor.com. Leigh, always a pleasure. Thanks very much for being on the show today.

Leigh Taylor 16:35
Thanks, Wayne.

Wayne Kay 16:36
My guest today, Leigh Taylor from LCTaylor, Licensed Insolvency Trustee, and you can find out more at LCTaylor.com. And that’s also where you can schedule your free consultation, book it online or give them a phone call. 

Well, that’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out Debtmatters.ca. Thanks so much for listening.