Low interest rates will “create their own risks” for the economy as it pertains to household debt levels, says the Bank of Canada deputy governor.
With household debt reaching extraordinary high levels, the Bank of Canada urges people to show prudence in their personal finances. Bank of Canada governor Mark Carney also warns of the risks posed by overstretched Canadian households, who currently carry a debt-to-disposable income ratio of 148%.
“Some have asked if increasing interest rates poses such a threat to households, why raise them? Yet others have asked if household debt is such a concern, why not raise rates and discourage borrowing?”
Once interest rates begin to rise, and they will rise, Canadians should look to their finances to ensure that their current debt will be serviceable at the new rate levels.
Over the past decade, home-equity lines of credit and loans surged by as much as 170%, or almost twice as fast as mortgage debt.
We saw this in the U.S. as people used their homes as ATMs, built up insurmountable personal debt and when interest rates rose, they couldn’t manage their debt. The Finance Minister has sited this as a growing issue and may institute measures to curb household debt growth.
This trend has slowed of late, and recent reports show that Canadians are reining in their credit card debt (the worst kind of debt), but with the loan demand remaining to expand at a faster pace than personal income, Canadians should be more mindful of the debt they are taking on in these times of low interest rates.