Nathalie Slight | Journalist
In 2016, 70% of Quebec households were in debt. At first glance, this statistic can be pretty scary. So, should Quebec consumers be worried?
Hélène Bégin, Senior Economist at Desjardins Group, spoke to us about debt.
In recent months, Quebecers and their debt made headlines such as "Quebecers are deeper in debt than ever!" or "Debt has reached historic highs in Quebec!"
"When newspapers report that in 2016, household debt in Quebec was at 155%, it's scary. But before sounding the alarm, we need to put this figure into context. Where did we get this 155%? By looking at the total consumer debt (consumer loans, credit cards, personal lines of credit, car loans and mortgages) in relation to annual after-tax income for all households.
The result of this incomplete calculation is terrifying, much more so than the reality," says Ms. Bégin.
There are two problems with this classic debt ratio. "First of all, it doesn't account for time. For example, a $150,000 mortgage can be amortized over 25 years whereas this ratio calculates the repayment based on only one year's salary! According to this formula, a household with $75,000 in after-tax income will have a 200% debt ratio. Alarming! Secondly, the classic debt ratio doesn't account for interest rates.
To get the right information about debt, we need to calculate the borrower's total monthly capital and interest payments compared to their gross monthly income. This equation, which takes debt, income and interest rates into account over a single and same period, has shown that the capacity of Quebec households to repay their debt has been stable over the years.
This can banish many debt-related nightmares!" says Hélène Bégin.
In short, Quebecers' debt is high but low interest rates allow them to manage their monthly payments.
"In other words, the majority of Quebec households aren't choking. They're able to repay their debts. Another positive point about low interest rates is that Quebecers have paid back much more capital than interest in recent years. This means that their assets have increased."
That said, Quebec households aren't sheltered horror stories. "Even if a sudden rise in interest rates or a drop in residential real estate prices seems unlikely, it's best to be cautious and anticipate a gradual rise in interest rates, which we've actually seen happen since July.
For example, if the mere thought of upping your monthly mortgage payments by $50 sends shivers down your spine, it's definitely time to review your financial situation," says the economist.
Here are some useful links to learn more about debt: