Canadians and debt seem to go together like Peanut butter and jam or milk and cookies. At one time, debt was something that was more common when you were young because you bought your first house and were raising children. The goal over your lifetime was to pay off the debt off by the time you retire. It seems times have changed. According to a recent survey by CIBC, 59% of retirees are carrying debt in retirement. It used to be that the common belief was you had to be debt free in order to retire. According to this same study, Canadians still place being debt free for retirement as a priority over being close to family, having hobbies, and being around family. Unfortunately, more pre-retirees are stressed about retirement because of increasing debt levels and the possibility of having to carry that debt into retirement.
So why are retirees carrying on so much debt?
Debt is more accessible than ever. There was a time when the financial industry discouraged dent and encouraged debt reduction as a prudent financial strategy for retirement. Today, financial institutions realize that offering debt is good for their bottom line. So much so that they are making debt more and more accessible through lines of credit, credit cards and other loans. Do you think profitability has anything to do with this advice?
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Values on spending
Not only is it fun to spend money, it’s easier than ever to spend. Increased consumer spending has become a common solution for economist, politicians and policy makers. We are now a society that is all about consumption, material wealth and keeping up with the Joneses.
It’s so easy to spend money and even worse, money we don’t have. We are constantly tempted to spend money whether it’s online, watching TV, opening up the newspaper, driving home from work or being harassed by spouses and kids. Every holiday has been turned into an excuse to have a sale and spend money.
Related article: A disciplined spending plan
Low interest rates
There is no question interest rates have played a big role in the amount of debt we carry. Low interest rates have fueled consumption patterns. It has clearly made it easier to buy homes, cars and other consumer items. We can take on more debt without affecting our cashflow. At a 10% interest rate, you would pay $1000 of interest on a $10,000 debt. At 6%, you can borrow $16,667 and still pay the same amount of interest.
Related article: How much debt is too much?
Rising housing prices has increased Canadian Debt. 75% of the debt in Canada is attributed to mortgages. As Real estate prices rise, Canadians are forced to take on more debt to buy the same relative home from 5 to 15 years ago. Canadian lenders have also made it easier for borrows to borrow more money for a longer period of time. Amortization periods on mortgages went as long as 40 years until the government stepped in to institute laws to shorten amortizations. All of this leads to why there is more debt.
Related article: Predictions for Real estate prices
Times are tough
Bear markets, stock market corrections and economic recessions have not only made it tougher to save money but it’s also forced some people to rely on debt to get them through periods of unemployment, lower income and tough financial situations.
There are so many contributing issues to the high debt levels. Can you think of any other reasons?