Have you maxed out your household debt?

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By Sabrina Almeida

A new IPSOS survey for business advisory firm MNP Ltd. revealed that the number of Canadians maxing out their household debt is on the rise. According to the poll results nearly half of us, 48%, are $200 or less away from financial insolvency when compared to 46% in the previous quarter.

Around 54% of those surveyed worried about debt repayment while 35% believed that an interest rate hike would make them bankrupt. Even more troubling is that four out of ten people polled felt they might not be able to meet living expenses without taking on more debt in the coming 12 months.

So, if you have no idea of how to repay all your loans or are anxious about how your finances will survive any rise in interest rates… you are not alone.

This disturbingly growing trend is believed to be the reason why the Bank of Canada (BoC) maintained the current interest rate at 1.75% and downgraded its economic forecast for 2019. In fact, some economists suggest that the BoC could even be forced to cut interest rates in the near future if the situation gets worse.

Although MNP President Grant Bazian doesn’t believe living beyond one’s means is responsible for this overwhelming debt load, I disagree. Overextending one’s financial capabilities surely plays a big role in it. Many South Asians (a community once considered to be financially prudent) are blissfully on the edge of a financial precipice because the desire to get rich via unaffordable real estate investments and a flashy lifestyle override any fiscal common sense.

Housing is without a doubt the biggest culprit. High home prices and stricter mortgage qualification rules have done little to ease the cost or debt situation. Unregulated lenders have flourished as a result of it.

A South Asian gentleman with poor credit scores shared how simple it was to secure a housing loan through nefarious means. Several realtors expressed their ability to help him get a mortgage for a sizeable fee. He is currently working two jobs to clear a loan from an unsecured line of credit (with 12% interest) as well as his student loan before exploring the options presented to him.

This is not shocking as several South Asian families have bought huge homes and multiple investment properties by fudging payslips, regulated savings accounts and other documents to obtain high  interest mortgages. But like him, they aren’t worried about piling on more debt. Many depend on rental income from their primary and investment properties to make ends meet. They aren’t averse to squeezing themselves into the basement and renting out the rest of the house if needed. For instance, one family rented out all but the two bedrooms of the four-bedroom house they owned for $800 per room with meals to increase their income.

Car loans are the next big reason for growing debt. The same gentleman drives a luxury sedan which he financed. Couldn’t he have reduced his owing by purchasing a less expensive vehicle? His response was, “you only live once.” He is willing to take on a third job to fund his home and lifestyle at the cost of spending time with his children. Several others, like him, live out their fantasies based on what vehicle payments they can squeeze in each month. Savings are not part of their financial plan, assuming they even have one.

That Canada is experiencing a debt crisis is an understatement. Most borrowers have no plans to repay mounting loans except if they win the lottery and stay afloat by making minimum payments. Furthermore, unscrupulous realtors and lenders advise them to use whatever little home equity they have to make real estate investments and other purchases dragging them deeper into debt. But they seem to be oblivious of the risks, encouraged perhaps by relatives, colleagues and friends who are following a similar path.

Lenders also seem to have no plan to recover their money prompting concerns about the ability of Canadian banks to handle further slowing of the economy. In fact, Steve Eisman, the money manager of Big Short fame who predicted the collapse of the U.S. housing market, recently told a media outlet that they are “ill-prepared” for potential credit losses if the economy declines.

How do we turn this around? More affordable housing seems to be the likely answer much to the disappointment of all those who are hoping to get rich via their real estate investments. One school of thought suggests that unrealistic housing prices are the cause of the record high job vacancy rates as people are not willing to move where the jobs are. Unfortunately, this could reduce business investment and employment opportunities driving the economy even lower.

Sliding bond yields and lower mortgage rates that could encourage real estate investments are hardly the solution for an increasingly house-poor and debt-ridden society.

However greater oversight and a crack down on unregulated lenders might be a huge help!

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