How the banks persuaded Canadians to pay off their debts

Oh, Canada. Can we talk about your debt load?

The past several years have been a marathon of nagging you to get control of your debts for personal finance writers. Just in time, you are finally showing some progress. Keep it up, kid.

The latest borrowing stats came out last week and they showed debt loads have lightened just enough to matter. The ratio of household debt to net income fell to a two-year low of 168 per cent in the first three months of the year from 169.7 per cent in the fourth quarter of 2017.

Canada: You’ve had a moment such as this in the past five or so years where you seemed to be taking debt seriously, but then you didn’t stick with it. Borrowing growth merely paused before chugging higher. Today, there’s good reason to believe you’re more committed to addressing your debt than in the past.

The difference in interest rates for savers and borrowers is a big part of this. While banks have been making significant increases in the interest rates you pay on lines of credit, mortgages and loans, they were stingier with higher rates on savings products. “Banks have created an incentive for people to pay down debt,” said Carlos Cardone, senior managing director at the financial industry analysis firm Strategic Insight.

There were signs in early 2018 that you responded quite shrewdly to this rate increase, Canada. To understand the trend, you have to look at inflows of money into bank deposits such as high-rate savings accounts. For years after the 2008-09 stock market crash and global financial crisis, you poured money into these accounts. But in the first two months of 2018, that abruptly changed.

According to data gathered by Strategic Insight, there was an outflow of $8.4-billion from savings and chequing accounts. That’s on a base of about $1.4-trillion, so it’s not a flood or anything. But it does suggest you had a change of heart about what to do with some of your money.

You didn’t put it in mutual funds – Mr. Cardone said he can tell this by the kind of registered retirement savings plan season the fund industry had this year. Good, not great. So where did that money from bank deposits go? Based on conversations with a few bankers, Mr. Cardone’s working theory is that it went to pay down debt such as home-equity lines of credit.

Please tell me that’s exactly what you did, Canada. It would be encouraging for all who worry about the country’s debt burden to know that you’re worried, too.

The data gathered by Strategic Insight show that flows into bank deposits were at more normal levels in March after the outflows in the first two months of the year. It might be that you were shocked by rising interest rates early in the year and paid down some debt, then lost interest in debt reduction. Also, savings rates have lately risen somewhat.

But giving up on debt repayment would be a mistake. While the economy isn’t booming, it’s solid enough that there’s an expectation that the Bank of Canada will raise interest rates in July. This would take the central bank’s benchmark overnight rate to 1.5 per cent from just 0.5 of a point in mid-2017.

You should expect more rate increases in the next 18 months or so, unless the trade dispute with the United States gets worse. Then, you have a different risk. Interest rates would stabilize or even fall, but your income could be vulnerable to reduced hours or layoffs.

Canada, there’s one more reason beyond the risk of rising rates for you to curtail new borrowing and chip away at the debts you already have. Pay increases are on the rise, which gives you a little extra juice in your household budget. I’d love to tell you to add that extra to your tax-free savings account or RRSP, but paying down debt is more important.

Don’t bother with the counter-argument that you can make a better return investing than you’re paying on debt. Maybe you can, but I doubt it. Debt repayment is a guaranteed result. What else can you say that about in your financial life?

But, enough nagging. You’ve done some good work addressing your debt this year, Canada. More, please.