The topic of debt consolidation is an important one to discuss, and not only because we are just beginning what could be a long recovery from the economic recession of the past year. The recession has not caused debt problems for most Canadians. It has merely exacerbated a problem that already existed before the recession hit.
Consider the results of a Vanier Institute report released in early 2009. Called The Current State of Canadian Family Finances 2008 Report, the study includes some troubling numbers.
Debt loads are in what the report’s authors call the “danger zone”. Average household debt increased to more than $90,000 in 2008. Looking a little more closely, the report also shows that the total debt to disposable income ratio climbed to 140% in 2008 – the highest level in 44 years.
Of equal concern is the ratio of consumer debt plus mortgage debt. Sitting at 127% of disposable income in 2008, the rate is higher than what we saw in the U.S. in 2006, just before the bubble burst on their housing market.
The Debt Service Ratio (DSR) measures the percentage of gross income spent on interest on household debt plus payments on the principal. A “dangerous” DSR is anything in the 40% range. In the U.S., 6.3% of households had a dangerous DSR at the time the Vanier study was conducted. In Canada, 4.4% were in the danger zone. That 4.4% translates into 600,000 households. Unfortunately, many of those households are in the lowest third in terms of income. In other words, low income households are struggling harder than most with unwieldy consumer debt.
The report also reveals that spending and debt are rising faster than incomes: “The average household income rose to $65,200 in 2008 and was up by 11.6% since 1990. Spending increased twice as fast (+24.4%) over the same period while total debt (+71%) increased more than six times faster than incomes.”
The bottom line – people are spending more than they earn and carrying enormous amounts of debt, much of it in the form of high interest credit card debt. The average Canadian has more than 2 credit cards, and in the five years between 2002 and 2007, MasterCard and Visa transactions jumped 60%, with the total value of sales increasing by 55%.
Although some claim the recession has ended, the pain will be felt by many well into 2010 or beyond. Job losses continue to mount and our economic difficulties threaten to push many people into insolvency.
Many mortgage brokers are trained to offer debt consolidation services to help homeowners get a handle on their debt. For those with a decent amount of equity in their homes, a home equity loan or line of credit – at current low interest rates – can give them the money they need to pay off high interest debt. If you are concerned about your personal debt, talk to a professional about debt consolidation with a home equity product.