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Canadians get the message on saving more, borrowing less

The common-sense Canadian is back.

We're borrowing less voraciously and saving more aggressively. In fact, our personal savings rate is now twice that of the U.S., and about six times higher than it was almost a decade ago. "All the talk about the Canadian household being tapped out or out of shape is a bit overdone," said Doug Porter, chief economist at BMO Nesbitt Burns.

Americans used to be kings of consumption, but we usurped them a few years ago as their economy sagged and ours merely wobbled. Manic borrowing by Canadians ensued, along with indifferent levels of savings. Now, at a time when there's concern about a housing-market correction and slow economic growth, we have a positive story to add to the mix in the form of more responsible borrowing and saving.

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The declining trend in the growth rate for household debt has been apparent for months now. What's new is the positive data on the savings rate, which hit a ridiculous low of 0.9 per cent back in the first quarter of 2005.

Statistics Canada pegged the household savings rate for the first quarter of 2013 at 5.5 per cent, which compares to 5.4 per cent in the final three months of 2012. The rise in the savings rate is actually more impressive than it first appears, though. When it first announced numbers for the fourth quarter of last year, Statscan pegged the savings rate at 3.8 per cent.

Revised numbers aren't unusual in reporting economic data. What's different here is the magnitude of the improvement in savings. "The savings rate is still probably lower than would be ideal, but it's hardly the low rates that we've occasionally seen," Mr. Porter said.

The savings situation looks more encouraging still when we consider the amount of money that people have been pouring into their mortgages to pay down outstanding balances. A recent report from the Canadian Association of Accredited Mortgage Professionals estimates that close to one million mortgage holders made lump-sum payments last year, totalling $10-billion.

Also, nearly 1.1 million people voluntarily bumped up their regular mortgage payments last year, with the amount of the average increase pegged at $300. Mr. Porter said all these mortgage numbers are "confirmation that there are some positive things going on here, some subtle ways that we are seeing people save."

The latest numbers on borrowing are also favourable, even though survey results issued Wednesday by Canadian Imperial Bank of Commerce suggest that nearly half of indebted people haven't made a dent in what they owe in the past year. More encouraging is a new report from credit bureau TransUnion showing a drop in the average level of personal non-mortgage debt from the fourth quarter of last year through the first three months of 2013. The 2-per-cent quarterly decline to $26,935 is the largest since TransUnion began tracking this data back in 2004, and a sign that people are easing up in their borrowing through loans, credit cards and lines of credit.

The debt-to-income ratio is the most-often-cited measure of household debt levels, and the most recent numbers were ugly. Statistics Canada's most recent data put the ratio of household debt to disposable income at 165 per cent, which is comparable to the peak reached in the United States in 2007, just before the housing bubble exploded. Worse, our debt-to-income ratio has been rising steadily for years without pause.

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But even here, there's some reason for optimism about the personal finances of the nation. With disposable incomes rising in the latest quarter, Mr. Porter suggests it's possible we could see the debt-to-income ratio stabilize or even decline a bit.

Some background on the savings rate: It's based on personal income left over after all usual expenses and consumption, and not specifically on money flowing into bank and investment accounts. If we focus just on financial assets, such as bank deposits, mutual funds, stocks, pension assets and life insurance, we get a total of $4.7-trillion. The total debt figure is much lower than that, at $1.7-trillion.

A more commonsensical balance of borrowing and saving isn't great for the economy, given its reliance on consumer spending. Still, we all benefit. There's less pressure on the Bank of Canada to use interest rates correctively against excessive borrowing, and less froth in the housing market. Households are better able to withstand any future financial setbacks, and save for retirement and for their children to attend college or university.

The usual personal finance column suggests you do more of one thing or less of another. The message here is simply to keep up the good work.

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Five ways to save more and get out of debt faster

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1. Set up an automatic transfer of money into a high-interest savings account every time you get paid.

2. Ask your lender if you can increase your mortgage payments by 10 per cent.

3. Increase your regular contributions to registered retirement and registered education savings plans by at least the same amount as your pay increases this year.

4. Strive to have any outstanding balance on your line of credit paid down to zero in the next 18 months at most.

5. Track your monthly household spending and aim to cut down on your biggest non-essential expenses.

For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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