Indebted Canadians more optimistic, but still close to the brink

A new study shows fewer Canadians are wary of higher rates’ impact on their ability to pay down debt

Indebted Canadians more optimistic, but still close to the brink

The latest MNP Consumer Debt Index, based on a poll conducted by Ipsos for MNP LTD, has risen ten points since March, indicating that Canadians are feeling better about their debt as well other issues related to personal finance. Among those surveyed, 61% felt that their debt situation has improved, including 27% who compared their current situation to a year ago and 35% who said it has gotten better compared to five years ago.

The proportion of Canadians who thought they could cover all their living and family expenses in the next 12 months without taking on more debt has reached 57%, up four points since March. Those who believe a rate hike would push them into bankruptcy have declined by five points, settling at 28%. There’s also less overall concern about debt repayments (49%, down 2 points) and getting into financial trouble (42%, down two points) because of rising rates.

Thirty-eight per cent of Canadians reported that they were starting to feel the effects of rate hikes, which is five points less than in March. More are reporting that they have a solid understanding of the impact of rate hikes on their finances (78%, up four points).

The future is also looking brighter for Canadians. Asked about their one-year debt outlook, 38% said they expected to have a better debt situation, compared to only 9% who thought it would be worse; the 29% differential is the highest documented since tracking began. Extending the outlook to five years revealed 50% expecting a better situation and only 8% thinking it will be worse.

“Canadians might be feeling more optimistic but the question remains: will they actually be able to absorb higher debt servicing costs as rates rise?” said MNP President Grant Bazian. He noted that 27% of Canadians still say they have no wiggle room after paying bills and debt obligations at the end of the month. And despite a downward trend since December, the proportion of those who are reportedly $200 or less away from financial insolvency is still at 44%.

He also stressed that despite Statistics Canada’s recent announcement of the biggest drop in the household debt ratio on record, the level of household indebtedness — to the tune of $599 billion owed on credit cards and other non-mortgage consumer debt — is still concerning.

When asked what they did to deal with their current debt situation, 52% of those whose situations improved said they cut down on variable expenses like coffee, lunch, and entertainment. Others reported steps like budgeting (43%), finding ways to reduce fixed expenses like rent or mortgage payments (28%), and doing side gigs like selling (23%) or taking on another job (11%). Only 6% said they sought professional help for their debt.

“Two things likely got us to this point: a lack of financial literacy, and credit providers lending to borrowers who are overconfident about their ability to repay,” Bazian said. “For those who are in debt and already struggling to make ends meet, slowly pumping the brakes on spending isn’t going to be enough at this point.”