COMMENTARY: Are indebted Canadians foolhardy or prey?
When the Bank of Canada increased its overnight rate by a quarter of one per cent last week, it seemed like a minor news story in a time of trade turmoil and summer heat.
Almost immediately the major banks announced increases in their prime rates and bumped mortgage and consumer loan rates higher. Some experts warn that there are three more rate announcements due in this calendar year and there may be more hikes ahead. That’s not guaranteed but it’s concerning. Canadians carry almost $600 billion in non-mortgage debt and that money ain’t free. The lending business relies on interest and, well, they’ve done very well since Biblical times.
When I was very young, before my parents could afford to buy their first house, my late mother told me it was very difficult to obtain a mortgage. She said that even an unpaid library fine would disqualify you from the Canadian dream. I’m sure she was exaggerating; at the time, banks were extremely careful about their credit at a time when Canadians were known as almost pathological savers.
Our first family home, a semi-detached, had three mortgages. When my parents renewed their mortgage in 1983, rates were through the roof: I believe they got a “deal” at 18 per cent. That seems almost unimaginable now, but it was a reality that should have taught lessons at the time.
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Fast forward a generation, and money became cheap. Banks and independent lenders were in fierce competition to grow their customer base. We saw with the 2008 financial crisis in the U.S. that the competition was so intense, people who had no business being in the market were getting mortgages with credit scores lower than Winnipeg temperatures in February. When their house values dipped below their debt levels, the predatory lenders called in the loans and places like Las Vegas and Florida became ghost towns.
Canada avoided much of the credit crunch 10 years ago because our banks tended to be less sleazy than lenders in the U.S. But we have been living in a time of cheap money so long, the reality of the early 1980s would be devastating. MNP, an insolvency company, reports that almost half of Canadians polled by IPSOS would be close to bankruptcy if rates approach even a fraction of what we experienced 35 years ago.
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Callers to my radio program over the years have placed the blame squarely on the shoulders of consumers who take whatever credit is offered them. I don’t disagree, but I do believe that the lenders share some responsibility.
Have you ever called your credit card hotline and immediately been offered a limit increase just by pressing “1” on the keypad? Or received a bank letter in December offering one or two months of no card payments as a “special holiday thank you”? Yes, you can not press “1” and throw the “skip the payments” letter in the garbage. But we’re human, we want the best for the kids and that extra $5,000 on the card would easily cover a week in Cancun.
So you’ve pigged out on cheap money and things are getting tight. You’re three days late with a payment and suddenly the bank tells you they’re increasing your interest rate. A random credit check sees your debt-to-income level is too high and your credit limit is immediately reduced. I am a big believer in personal responsibility, but when you find yourself in a crunch, the formerly jovial lenders bare their teeth. To them, you’ve morphed from a financial “partner” to “prey.”
One of the first lessons I learned at a Las Vegas blackjack table was this: when you sit down and collect your buy-in of chips, you are a hero. The waitresses keep the drinks coming. The dealer is your pal. The bosses want to know if you want comps on the shows, food or even your room. But when the hours pass and your chip count is down to zero, you’re a bum in a chair. A degenerate. Unless you hit the ATM and toss down more cash, they will gladly show you the exit.
When it comes to personal debt, too many Canadians became slaves to the free drinks and show comps. They should have instead memorized the way to the exit.
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