Indebted households put recovery at risk, says report

The 31% figure is uncomfortably close to the Bank of Canada’s definition of “financial vulnerability,” which is when a household’s debt service ratio is 40% or higher. The bank has warned that households with debt service ratios above 30% present a potential risk, since “unforeseen income or expense shocks can quickly put them in a financially precarious position,” the Prosper report noted.

The highest-income households spent just 10% of their income on debt repayment.

The study also found that as household income increased, so did the percentage of households carrying debt: 49% of the lowest-income households carried debt, while 84% of the highest-income households carried debt.

The BoC has repeatedly warned of the economic risks of heavily indebted households. The Prosper report observed that the Covid-19 pandemic will probably increase the risk of insolvency among already vulnerable households.

Low- and moderate-income households with debt were most likely to owe credit card debt and installment loans, rather than mortgage debt — which was carried by just 20% of lowest-income households.

“Installment loans from high-cost credit lenders have emerged as a new alternative to payday loans and are the fastest growing form of consumer credit in Canada,” the charity stated in a release.

Seventy-one percent of the highest-income households, on the other hand, held mortgage debt — a type of debt that, unlike most consumer debt, directly contributes to building wealth.

Nearly a quarter of the lowest-income households held student loan debt, compared with 15% of the highest-income households.

Prosper’s report said that households in precarious financial situations have few options for obtaining financial advice, adding that other countries had established national money management and debt counselling services prior to Covid-19, and then expanded them in the wake of the crisis.

“Canada lags peer nations like Australia, New Zealand and the U.K. in ensuring vulnerable households have access to free, quality, financial help to deal with money and debt problems,” said Elizabeth Mulholland, CEO of Prosper Canada, in a statement. “Canada has the necessary organizations, expertise and suitable programs we can quickly scale up to help those who are struggling — but only if  our governments make the necessary public investments.”

The report also recommends the government fund more frequent research into household debt. Statistics Canada has only administered the Survey of Financial Security five times since 1999, most recently in 2019 (for which data is not yet publicly available). “This infrequency means that the data we have is often years out of date and may not accurately reflect the actual debt experiences of households,” the report said.

Prosper added that “modest public spending” would “prevent households from falling into crisis and placing additional pressure on public services. It will also address a major potential brake on
Canada’s broader economic recovery.”