It's seemingly counterintuitive for financial institutions to encourage their customers to hold more cash in their accounts. After all, banks and credit unions make money by putting your money to work in financial instruments ranging from mutual funds and stocks to mortgages and lines of credit.
But as economic prospects remain muted in Canada, behind every suggestion from financial institutions for households to put more money aside for a rainy day are growing fears over household solvency.
Canadians are apparently losing their traditional small-c conservative sentiment toward financial risk.
That seems clear from all the talk about record levels of household debt in Canada.
Whether we're buying more expensive homes or borrowing to satisfy our desire to indulge in retail therapy, Canadians seem OK with accumulating debt.
But debt isn't the problem. Not for the vast majority of Canadians and homeowners in B.C. According to Canadian Bankers Association data, less than 0.5% of all mortgages in B.C. are behind on their payments and less than 1% of credit card holders in Canada are delinquent.
And even though overall per-household debt might be rising, the proportion of income needed to service that debt has remained fairly consistent for much of the past decade.
According to Statistics Canada, Canadians have spent on average around 4% of their income to service their mortgage debt and less than that for consumer debt since 2002. An RBC Economics report noted total household debt ratios have remained nearly 1% below the long-term average in Canada for the past five years. And with long-term mortgage rates potentially staying near record lows for several more years, debt is likely to remain manageable for most homeowners across the country. This will be especially true for Canadians who decide to lock in their mortgages for 10 years at a fixed rate of less than 4%, which is currently being offered by various financial institutions and is well below posted five-year fixed rates above 5%.
A key risk for households is the source of their net worth, which is increasingly being put in volatile assets. More on this next week. •
