Credit monitoring agency TransUnion has released its latest report on the state of Canadian financial health, and finds that for the most part, year-over-year levels of household debt in Canada have continued on their upward swing – and have now reached a milestone that has some lending experts voicing their concern, as debt growth also outpaced growth in disposable income.
Total household debt amounted to 100.6 per cent of Canada’s gross domestic product in the second quarter of this year, according to Statistics Canada.
Average consumer non-mortgage debt balances also rose to $21,686 at the end of the third quarter, up from $21,195 in the same quarter last year. The Canadian appetite for debt has been fuelled by low interest rates and an increasingly competitive housing market.
Though the average amount of household debt has increased, TransUnion also noted that delinquency rates have stayed low – also continuing a trend in Canada. However, consumers must remain aware that apparently low borrowing costs need to be approached with a rational and well-organized long term plan for the use of funds. Rather than accruing debt as a relatively inexpensive catch-all resource, Canadians need to build the use of debt in moderate quantities into their financial plans in such a way that debt loads have a defined duration with an expected, reachable target for full repayment.
If this news shows that consumers need to build their financial plans to include, rather than to be based on, debt, it also gives important feedback to lenders. Continuous testing and modelling of portfolios, as well as stress testing for changes to the interest rate, will be critical to ensuring the financial safety of debt consumers. Financial technology firms have much to contribute in this regard, as they are at the forefront of new developments in predictive and statistical analysis of borrowers’ capacity to hold debt over both the long and the short term.