Household Debt to Disposable Income Ratio at New High… but that’s not the real story!

Household debt is once again making news headlines for all the wrong reasons. The household debt to disposable income ratio reached a record high of 163.3 percent in the fourth quarter of 2014, according to Statistics Canada. That means for every dollar of income earned, the average Canadian household has $1.63 of debt. What the story fails to properly cover is the fact that while household debt is alarmingly high it is actually payments and not total debt that causes households financial stress. Additionally – the fact remains that while household debt is at an all time high… so is household net worth.

With interest rates showing no signs of heading up anytime soon, Canadians are piling on consumer debt like there’s no tomorrow. Most economists were predicting the Bank of Canada would start raising interest rates midway through 2015, but those plans appear to be out the window. Plummeting oil prices have tied the Bank of Canada’s hands. No one could have predicted the price of a barrel of oil would fall from above $100 to $50 a barrel in only six months.

The list of those caught off guard apparently includes the Bank of Canada, who shocked the markets by lowering interest rates to 0.75 percent from 1 percent. The big banks soon followed suit by lowering prime rate, albeit by not as much. A week after the overnight lending rate fell by 25 basis points, the big banks lowered prime rate by 15 basis points, to 2.85 percent from 3 percent.

Those with variable rate mortgages enjoyed immediate savings. The surprise cut in interest rates prompted Government of Canada bond yields to tumble. Anyone in the market for a home or renewing their fixed rate mortgage will enjoy some of the lowest mortgage rates in history.

Toronto Real Estate Market Continues Hot Streak

In Canada’s second most expensive real estate market, it should come as no surprise a lot of people have a significant portion of their net worth tied up in real estate. Real estate is fueling much of the rise in consumer debt. Lower mortgage rates means homebuyers can qualify for bigger mortgages than ever before.

Despite the frigid temperatures, homebuyers weren’t deterred from venturing out into the cold. February was a banner month for Toronto real estate. The average price of a detached home in Toronto proper exceeded $1 million. The number of detached homes sold in the resale market in February was up 16.9 percent year-over-year in February.

Don’t Get Caught Up in the Moment

Demand for single family detached homes continues to outpace supply. With homes in short supply, bidding wars are a regular occurrence, pushing home prices into the stratosphere.

When you’re smack-dab in the middle of the dreaded multiple offer situation, it’s easy to get caught up in the moment. Overpaying for a home is bad for a couple reasons: not only can you become a slave to your home’s hefty mortgage payments, your mortgage lender could refuse to approve your mortgage (or only lend a reduced amount) if they believe you overpaid. That can leave you scrambling at the last minute to find alternative financing. You know you’re in dire straits when you’re on your hands and knees begging your in-laws for money so the deal doesn’t fall through.

As David Chilton smartly pointed out in the Wealthy Barber Returns, a more expensive house means higher mortgage payments, utilities and property taxes. Don’t make the mistake of overspending and becoming a slave to your home. To see what you qualify for visit our mortgage qualifier calculator.

Back to Main Blog Page