Frozen Credit Card by Paul Stocker

More alarming news about Canadian household debt is coming through. Instead of taking advantage of low rates and repaying debts, Canadians continue to ask for more. After adding 4.5% (or $1000) on a year-to-year basis, the average Canadian family now has $26,000 in consumer debt, reports the TransUnion. $3,539 of this sum is in credit card debt. Now add another $75,000 in mortgages and you have more than $100,000 of debt carried by an average Canadian family.

This amounts to 150% of our annual disposable income, so you would need to live 18 months on air to pay off your debt. Concerning household debt indicators, Canada is among the worst of OECD countries.

The situation is alarming because we are now still experiencing record-low interest rates (the overnight rate by the Bank of Canada is 1%, while normal levels are around 4-6%). With inflation reaching 3.3% and still growing, the inevitable rate hikes are just a matter of time.

What’s going to happen then? Most of the $26,000 consumer debt has a floating rate, so your monthly payments will jump immediately — as will the variable rates on mortgages. Those who have fixed rate mortgages will get some time, but hikes are also inevitable for them. While a $500,000, 25-year mortgage with a 3.6% interest rate cuts your monthly disposable income by $2,500, a 1% hike will ask for $300 more and a 3% hike for $800 more.

What can you do to stay out of potential trouble? Try to pay all your consumer debts (credit cards especially) and avoid taking another loan with variable rates. Keep a substantial cash buffer for your mortgage (a sum of six monthly payments is ideal) and prepare a strategy as to how to cover the upcoming hike worth several hundred dollars per month. Think twice before you borrow.