Earlier this year, the Globe and Mail reported that the average household debt in Canada (minus mortgage debt) is approx. $38,000, which is very close to the amount of consumer debt that exists here in Toronto.
Last week the Toronto Star reported that the average homeowner in Toronto is carrying $40,000 in debt and that the debt to income ratio in Toronto has increased from 88% to a record 150% over the past 10 years. The headline of this article read, “Toronto's wealthiest are the most indebted”.
It is not a sign of wealth if the average Toronto household is $40,000 in debt, and the average Toronto household does not represent those who have the most wealth.
Increases in the cost of living combined with the recent recession and along with the ever-growing unemployment rate are all reasons for this astounding number. It is not a sign of wealth when, in many cases, the average family is dealing with debt that is more than their net annual take home earnings.
Is it easy to assume that people are living beyond their means? Sure it is, but we are noticing that this trend is part of a much deeper problem, with many moving parts.
Financial Institutions, including the big banks, have over the years made it far too easy for consumers to obtain credit. Credit that far exceeds their ability to maintain and bases their ability to repay their debt on the following factors:
-Their credit score (which is not a reflection of one’s cash flow)
-The equity in their home (the assumption is that if the debtor cannot pay they can always count on home equity to deal with their debt)
-Their household income (as opposed to the individuals’ income)
-The consumer’s income to debt service ratio; the credit limit is often approved based on the consumer’s ability to make minimum payments which often only covers monthly interest
When a consumer is granted credit based on the consumer’s ability to only manage interest payments, the consumer then becomes almost permanently indebted to the bank. If they cannot find the cash flow to make lump sum payments or pay 2-3 times more than their minimum payments, their balance will not move and they will forever owe the bank. Television programs like “Till Debt Do Us Part” have done a lot to shine a spotlight on this problem by showing individuals how long it will take them to pay down their debt if they continue to only make minimum payments.
The danger with these lending practices occurs when change happens in the household, such as an injury or an illness in the family, a marital separation, loss of employment etc… Individuals sometimes find themselves turning to credit to bridge the gap in order to make ends meet, the end result being even more debt. Those who have already maxed out their credit find themselves in deep trouble when they can no longer manage their minimum payments.
There is good news: the Canadian Government has responded by providing families who are struggling financially with access to programs that provide immediate debt relief. This can be achieved through freezing credit card interest, settling debt and these programs do not involve bankruptcy. If you are in trouble and would like more information on these programs please contact Michael Goldenberg at DebtCare Canada by calling (888) 890-0888 or by visiting www.debtcare.ca