CIBC: Canadians are Cutting Debt Levels

Household credit levels are rising at their slowest pace since 2001 as Canadians begin to understand the message about cutting debt levels, according to a report from economists at the Canadian Imperial Bank of Commerce (CIBC). The report was released today, is in contrast to renewed warnings from Bank of Canada officials that Canadians are piled with debt.

CIBC noted that from July 2010 to September 2010, household debt has grown at its slowest pace in nearly 10 years. Credit has increased by only 0.27% in October, which is the softest monthly reading in more than 10 years.

Benjamin Tal, deputy chief economist at CIBC noted that after coming through the most leveraged period of consumer spending in recent history, Canadians are getting the message that they need to cut back on their debt levels.

The overall credit growth has slowed down dramatically; mortgage credit levels are still rising at close to 7% on a year over year basis. In the past few months, the pace has slowed down.

The reduced demand for mortgage credit is far more noticeable among first time homebuyers.

We saw Federal Finance Minister Jim Flaherty unveil changes to the mortgage rules, which were designed to cool down the borrowing trends.

The new rules are as follows:

• Lower the maximum amortization for government insured mortgages to 30 years from 35 years
• Lower the upper limit that Canadians can borrow against their home equity to 85% from 90%
• Remove government insurance backing on home equity lines of credit

Tal pointed out that as Canadians’ debt continued to grow, the cost of covering these debts is trending downward.

On a brighter note, the CIBC report has noted that mortgage arrears appear to have peaked in February 2010 and are now stabilizing. The arrears rate is currently 0.43%, which is up from 0.24% in early 2006.

This is a significantly higher figure than it was before the recession, however we can be happy knowing it is still well below that of previous downturns in the economy.

Having spoken about debt all that is left is for us to evaluate our own debt levels and figure out what you can do to lower it in the coming months. We have to come to the realization that there is only so much we can borrow, before we find ourselves in so much debt that we are scared by the very thought of lowering it.

Keeping that in mind, we have to reduce our debt, and the best way to do so is to create a budget to manage our spending. By creating a budget we will be able to allocate where our money goes, with the ultimate goal to reduce your debt. It is great to see that Canadians are slowly lowering their debt levels; hopefully we can all keep this up until the level of debt is at a reasonable level.

How do you feel about Canada’s debt situation?

image source: Cindy Andrie