Canada’s brewing debt storm

Canada’s brewing debt storm

TORONTO.APRIL.16.2010 from assignment form "James Laidlaw and his wife took out a $250,000 mortgage to reno their house but if rates go up they will have to take the kids out of sports programs.? James is photographed in the kitchen will be eventually moved when the new addition is built. The home is currently about 1000sq feet and will become 1600 with the new addition to the home. PHOTO BY FRED LUM/ THE GLOBE AND MAIL DIGITAL IMAGE

TORONTO.APRIL.16.2010 from assignment form “James Laidlaw and his wife took out a $250,000 mortgage to reno their house but if rates go up they will have to take the kids out of sports programs.? James is photographed in the kitchen will be eventually moved when the new addition is built. The home is currently about 1000sq feet and will become 1600 with the new addition to the home. PHOTO BY FRED LUM/ THE GLOBE AND MAIL DIGITAL IMAGE Fred Lum/The Globe and Mail

For every $1 of disposable income, Canadians owe a record $1.47. How did it come to th

Paul Waldie and Steve Ladurantaye

From Saturday’s Globe and Mail Published on Friday, Apr. 16, 2010 10:00PM EDT Last updated on Saturday, Apr. 17, 2010 8:36AM EDT

Canadian borrowers are fast approaching a day of reckoning.

Lured by cheap money to buy up, buy in, expand and make over, families have pushed credit levels to a record high.

Now, mortgage rates are beginning to creep up and the Bank of Canada is poised to retreat from the record-low interest rates it adopted to fight the recession and spur recovery.

The end of the free-money era has left consumers more vulnerable than ever, and those who threw caution to the wind could soon face costs they can’t handle.

Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1-trillion. Put another way, Canadians owe about $1.47 for every dollar of disposable income. Even more remarkably, they took on more debt during the slump – a first for a recession – because borrowing was so cheap.

With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren’t rising fast enough to meet their day-to-day expenses.

Their woes could have a snowball effect: As debt-strapped consumers pull back, their credit woes spill over into the broader economy and risk putting a damper on the recovery.

For some, the trouble has already begun. John Silver, who runs Community Financial Counselling Services in Winnipeg, has seen his caseload increase 20 per cent from last year. “We re seeing more people coming in with more stress with regard to their debt,” he said.

Much of the recent rise in debt in Canada has been due to low interest rates, generally easier credit terms and fierce competition among lenders. Even when the recession hit in late 2008, Canadians remained far more confident than Americans in part because of a better housing market and stronger financial institutions. Consumer confidence in Canada is only about 20 per cent below where it was in 2007 whereas it’s 60 per cent lower in the U.S.

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