Canadians are labouring under a dilemma: service existing debt or cover the mounting costs of living
While COVID-19 motivated Canadians to reduce spending and gradually pay off their existing debt, the pandemic has also exacerbated households’ dependence on home equity lines of credit (HELOCs).
According to a recent white paper by GreedyRates.ca, this “now-normalized dependence on debt” stemmed from the key measure of Canadian household debt to disposable income exceeding 155% last year. To compare, the level was around 150% just after the GFC.
“Canadians are increasingly forced to choose between servicing their debt and adding to savings or covering the cost of increasingly expensive necessities such as housing and education,” GreedyRates reported. “Some Canadians have even been forced to sell assets or withdraw from their RR-SPs in order to keep their finances afloat.”
HELOC debt, which stood at more than $268 billion last year, has been increasingly used for expenses that GreedyRates said boosted credit card balances to the detriment of a significant number of Canadians.
“Some borrowers, particularly younger Canadians, are already struggling to keep up,” GreedyRates said. “The Bank of Canada found that, more than any other age group, 25-34-year-olds make interest-only payments on their HELOC, use HELOCs to meet payments on other debt, and would struggle if their payment increased by even $100 per month.”
Many Canadian households are now living paycheque to paycheque, a predicament made even worse by the rising costs of food and childcare and the volatility of the loonie. Long-term, these trends could be compounded by the impact of the pandemic on the labour market, GreedyRates warned.
“Suddenly, a robust global economy is precarious, and few industries have proven immune to the downturn,” GreedyRates said, adding that the second wave of infections will make itself felt in the job market this year and beyond.
