Newspaper article The Canadian Press

Canadians' Vulnerability to Debt Set to Climb in Coming Years: Budget Office

Newspaper article The Canadian Press

Canadians' Vulnerability to Debt Set to Climb in Coming Years: Budget Office

Article excerpt

Vulnerability to debt set to climb: PBO

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OTTAWA - The federal budget watchdog says in the coming years increasingly indebted households are poised to become the most financially vulnerable Canadians in decades.

The parliamentary budget office released a report Tuesday predicting the ratio of debt payments -- including principal and interest payments -- relative to disposable income will creep upwards over the next five years as interest rates rise.

The office projects that by the end of 2020, this ratio will increase to 15.9 per cent of disposable income from its late 2015 level of 14.1 per cent.

"Household debt-servicing capacity will become stretched further as interest rates rise to 'normal' levels over the next five years," the report said.

"Based on PBO's projection, the financial vulnerability of the average household would rise to levels beyond historical experience."

The increase would mean households would be even more vulnerable to negative shocks to their income or to interest rates, which could also have an adverse effect on financial institutions.

The budget office said the ratio's highest level over the past 25 years was 14.9 per cent -- a mark reached in late 2007.

Since 1991, the report said the total financial obligations of households has broken down, on average, in the following way: mortgage debt has represented 63 per cent of all debt, consumer credit 29 per cent and other loans eight per cent.

Over that period, household debt has increased each quarter, on average, by almost seven per cent on a year-over-year basis, the document said.

The budget office also noted that indebtedness has continued to edge higher in Canada, which has seen the largest increase in household debt relative to income of any G7 country since 2000.

Household debt loads have climbed during an era of low interest rates. The budget office said the effective household borrowing rate -- which the Bank of Canada describes as a weighted average of interest rates on various mortgage and consumer loans -- declined to 3. …

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