Household debt a worry: study

Ten per cent of Canadian households could get into financial trouble when interest rates rise, according to a study from TD Economics released Wednesday.

TD chief economist Craig Alexander said household debt, which includes mortgages, has become excessive as Canadians get more accustomed to easy borrowing.

"One in 10 is a high ratio," Alexander told CBC News. "It looks to us that Canadians' personal finances have gotten stretched." 

And he predicted those levels will continue to increase more rapidly than income growth.

The study came the same day the Bank of Canada warned that increasing household debt might become a drag on the recovery if it discourages consumers from spending.

The TD study said that even if the Bank of Canada's overnight rate only rises to 3.5 per cent by 2013, family debt might still rise five per cent annually. That should be a concern, the report said, given its prediction that incomes will likely grow only by four per cent a year.

At that rate, the TD report said, the ratio of debt to family income could rise to 151 per cent by 2013.

"Clearly this doesn't work," Alexander said. "Are we going to see Canadians decide to ramp up their debt levels from current levels? If so, then we're going to have a problem."

The study recommended keeping the debt-to-family income ratio to a range of between 138 and 140 per cent.

Banks also have a responsibility

Alexander said it's also up to banks to watch what mortgages and credit-card products they try to sell consumers.

"Lenders do have to be cognizant that they do need to be careful here," he said.

Alexander said Canadians should pay down debt now, instead of taking advantage of low rates to rack up more debt.