Last month I wrote about my concerns regarding the level of consumer debt, compared to savings, and talked about goals we could all set for ourselves heading into 2011. One of my personal goals this year is to demonstrate leadership in terms of helping our customers, and all Canadians, understand what it means when our personal debt is growing faster than our income. In particular, I want to focus on how we treat the most valuable asset most of us will own during our lifetimes, our home.
Here are some facts. In this low interest rate environment, Canadians’ debt levels – including credit cards, loans and mortgages – have grown much faster than their incomes. Debt levels are now about one and a half times disposable income, an even higher level than the debt-to-income levels of Americans. Total consumer debt in Canada now exceeds a staggering $1.4 trillion. The Bank of Canada and the Finance Department have expressed concern about personal debt, specifically about what would happen if interest rates were to rise and Canadians discovered they could not afford to be carrying these debt levels.
Where are Canadians getting all that spending cash from? Increasingly, from their homes. In the last decade, money borrowed by Canadians against the value of their homes, using Home Equity Lines of Credit or HELOCs, has grown 170 per cent, or twice the rate of growth of mortgages. Many HELOCs can be accessed via bank credit cards, so consumers can go shopping at the local mall, put down a credit card, and the cash comes right out of the equity in their home. The one most valuable and steady asset that traditionally was set aside as every family’s long-term nest egg is being whittled away. We just can’t keep treating our homes like ATMs. For the typical Canadian, the long term priority should be getting your home paid off, a view shared by most ING DIRECT customers who’ve taken advantage of our unmortgage, designed to help home buyers pay off their mortgages as quickly as they can possibly afford to.
Prime Minister Stephen Harper spoke about this problem last week, and this week Finance Minister Jim Flaherty introduced new mortgage rules to limit the amount Canadians can borrow against their homes. While these moves are prudent, it is unfortunate that the government needs to step in to change the behaviour of both consumers and lenders. Also, this only reduces the ability for Canadians to exacerbate this issue going forward and does little to reduce the debt levels that exist today. So, we still have an issue that requires attention.
We need to go further. We need to help change the way Canadians think about borrowing money and their financial independence. At ING DIRECT our business has been built on a foundation to help Canadians live a healthy financial lifestyle and here is our Canadian Charter of Financial Independence. I believe that banks and bankers do have a responsibility to speak out about this issue. We need to help Canadians understand the risk they’re taking by carrying such high levels of debt and what they can do to save their money and put their families on a much more solid financial footing for the future. As business leaders, I think we all have a responsibility to help Canadians understand what debt means to their financial future which is why I have always been passionate about this issue.
While lines of credit drawn from the hard earned equity in your home can, in some circumstances, afford people with more financial flexibility, often times it does just the opposite. Using the equity in your home to buy things extends the time it takes to pay off your mortgage, forces you to take on significantly larger interest payments over time and potentially threatens your ability to manage your personal and familial finances down the road when interest rates rise – and yes, interest rates are certainly expected to rise in the months ahead. That’s a risk that’s not worth taking for most Canadian families. Savings are the cornerstone of a healthy financial lifestyle and for homeowners, their biggest savings account is their home.