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As Covid-19 drags on, recent reports are showing an increased rate of Canadian household debt. It comes as no surprise that Canadians are taking on more debt in order to pull through these tough pandemic times. Even though the government took significant steps to provide income support on the verge of the pandemic, many Canadians still struggled to remain afloat. According to Artem Avvacoumov, debt adviser at York Credit Services, many Canadians who maintained their jobs did have a disposable income but nowhere to spend it due to the frequent lockdowns during the pandemic. This certainly contributed to slower economic growth in Canada and throughout the world.

Mortgage debt in Canada

A huge portion of Canadian debt is mortgage debt, particularly in British Columbia and Ontario. “We saw many Canadians trying to pull through the pandemic and remain up to date with their mortgage payments in order to reduce the risk of foreclosure,” says Artem Avvacoumov, debt adviser at York Credit Services. In fact, borrowers who lost their income due to the pandemic considered options such as deferred interest mortgages to protect their households. Even after the pandemic, Canadian household debt is likely to remain largely locked in real estate.

Debt to income ratio increases at record highs

According to a report released by Statistics Canada, the debt-to-income ratio in Q4 2020 in Canada was found to be 174%. The report further shows that Canadian households owe an average of $1.73 for every $1.00 they earn. Overall, the total debt in the country now stands at $2.1 trillion. The bulk of this debt is mortgage debt which is credit taken to buy property, and in 2020 it increased to $28.7 billion. Non-mortgage debt was shown to have declined significantly during this period. Non-mortgage debt, on the other hand, includes other forms of financing such as credit cards, payday loans, car loans and overdrafts. Statistics Canada reports showed the total non-mortgage debt by the end of 2020 at $789.5 billion.

The debt-to-income ratio metric, also known as debt service, calculates the amount of debt Canadians have for every dollar earned. 100% debt to income ratio simply shows that the amount of debt exceeds one’s earnings. This is typically a very dangerous financial position for anyone to be in. It creates an increased risk of financial challenges due to economic waves such as higher inflation or job loss.

Low debt service at the start of Covid 19 pandemic

In Q2 2020, which marked the beginning of the pandemic, the debt-to-income ratio was recorded at an all-time low of 159.36%. There are several factors that contributed to this decline.

For starters, there were multiple lockdowns and restrictions imposed all over Canada, which meant that people couldn’t spend their money the same way they would in previous years. Secondly, the Canadian government came in to offer financial support in the form of CERB, which provided many individuals with a source of livelihood, especially early on during the pandemic. With more access to cash and a reduced ability to spend it, debt ratios declined.

However, as the pandemic continued to drag on, government support decreased, and the levels of employment are yet to catch up, which is why the debt ratios were back up by the last quarter of 2020.

Lockdowns and restrictions cause an increase in disposable income

The report shows a spike in spending in February 2020, right at the beginning of the pandemic. This could be attributed to the fact that many consumers rushed to purchase supplies before the lockdowns and restrictions imposed by federal and provisional governments. However, there was a reduction in spending as soon as the lockdowns were imposed. Most people did not and could not spend their money as they were typically used to. In fact, most households saved their money others, especially those in higher income brackets, managed to pay off debts with the increased disposable income. Unfortunately, many households particularly in the lower-income brackets, lost their income which partly contributed to the increased debt. According to Artem Avvacoumov, debt adviser at York Credit Services, even though the government came in to support Canadians with funds to survive, many who lost their income were still unable to pay off their debts.

On the positive side, spending picked up again amid the pandemic as many households adopted online shopping, pickup, and deliveries. In fact, in areas such as Ontario and Columbia, there were huge booms of increased spending recorded in the middle of the pandemic. The reduced interest rates in home loans drove many to buy homes even though the demand was high.

Heavy reliance on government benefits

The survey also indicated that Canadians who used government benefits relied on them heavily to get through the pandemic. 3 in 10 Canadians took advantage of some form of government benefits during the pandemic. 76% of those who sought government support described them as critical in maintaining their day-to-day life. Those figures are concerning for Mr. Avvacoumov of York Credit Services. With inflation on the rise along with increased prices of all consumer goods, Artem fears that Canadians who are still depending on government support will continue to struggle once these benefits are withdrawn.

Inflation is not only felt in Canada but in many other countries that are yet to recover from Covid 19. Even though prices dropped in the early months of the pandemic when most people stayed home and reduced their spending, most sectors of the economy shut down months after, contributing to the decline in the world economy.

“We expect to see more and more people faced with increased debt and a limited income to support their day-to-day needs turning to the government and other non-profit making organizations to make ends meet,” says Artem Avvacoumov, debt adviser at York Credit Services. Most federal programs such as the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy that were set to support Canadians and their businesses during the pandemic have already expired. “The government had to extend programs such as the Canada Recovery Benefit because it was clear that the economy was hard hit and it would take more time for many households to recover,” says Artem Avvacoumov, debt adviser at York Credit Services.

In 2021, the government went ahead to extend wage and rent subsidies for Canadians until later in the year as it became clear that people still needed further support. Long-term job loss is still a reality for many Canadians, and the pandemic has made the situation more dire for such households. Withdrawing or substantially limiting government support will make it even harder for households facing job loss post-pandemic times.

Has the pandemic affected your debt?

Dealing with debt is often a stressful experience, not to mention the potential economic impact of the Covid 19 pandemic. Artem Avvacoumov, debt adviser at York Credit Services, shared tips on how to help manage debt in difficult financial times. “If you are falling behind on mortgage payments or credit card debt, a good place to start would be to call your lender and explain your situation. Most lenders have in place programs that can help you manage the situation until you’re back on your feet,” says Artem. Credit companies are known to offer accommodations, but this is only available for proactive borrowers who reach out and explain their circumstances. These programs can allow borrowers to delay or adjust payments temporarily or even avoid interest charges. By reaching out to the lender and getting these accommodations, borrowers can avoid negative credit reporting before it’s too late. There are also longer-term programs offered by lenders and credit card companies for borrowers who are seeking to pay off debt over an extended period and at reduced interest rates.

How to protect your credit after the pandemic

When you reach out to your lender regarding delayed or missed payments, it’s important to prepare and share critical details regarding your financial and employment situation. It is expected that the wait time for lenders to respond may be long since many of these credit institutions are facing high call volumes after the pandemic. It’s important to clearly disclose how much you’re able to pay by taking into account your income, expenses, and assets. Find out if the lender has any hardship programs for borrowers experiencing financial losses due to the pandemic. Keep in mind that there are consequences to enrolling in any of those programs. For instance, your credit limit may be affected.

What to do if Covid-19 has affected your debt

The pandemic has affected the health and finances of Canadians all over. If you are struggling with debt due to job loss, reduced income or other reasons, there are plenty of options to navigate these challenging times. Credit counselling in Canada allows you to understand these options and get the support you need to manage your finances. Don’t navigate this overwhelming period alone.


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