OREANDA-NEWS. October 08, 2015. BMO Wealth Institute today released a report examining the different types of household debt, the amount of debt Canadians have and their attitudes towards it. The report, titled Household debt in Canada - the good, the bad, and the ugly, also looked at Canadians' habits around household debt considering the current economic environment.

According to Statistics Canada, Canadian families owe an average of \\$1.63 for every after-tax dollar they earn. The BMO Wealth Institute report notes that the key to managing debt is determining if it is being used properly; it divides debt into three types: good, bad and ugly. Good debt includes loans that advance an individual's ability to purchase assets or increase income, whereas bad and ugly debt represents loans that allow an individual to enjoy a standard of living which cannot be supported by their earnings.

The report asked Canadians what their feelings are towards debt, finding that:

  • Debt makes them feel nervous and insecure (36 per cent)
  • They are using debt to build wealth (22 per cent)
  • They don't need debt and won't use it (20 per cent)
  • Debt is necessary for them to take on to help family or friends (16 per cent)
  • They are using debt in excess for consumption (7 per cent)

"The ultimate goal of most Canadians should be the elimination of debt, but the first step needs to be getting rid of bad debt which has the potential to destabilize a household's financial situation," said Chris Buttigieg, Senior Manager, Wealth Planning Strategy, BMO Financial Group. "A financial professional can help you avoid having your debt lead to long-term financial instability and work with you to develop a plan to sort out your balance sheet as quickly and efficiently as possible."

Household Debt and the Real Estate Market

According to the report, almost half of Canadians (47 per cent) believe that the high level of debt in Canada has been influenced by rising real estate values.

The report also looked at how low interest rates have affected Canadians' financial decisions. It found that the low-rate environment has allowed them to:

  • Pay down their mortgage (35 per cent)
  • Live the lifestyle they want (26 per cent)
  • Purchase investments and/or real estate (26 per cent)
  • Buy a house sooner than expected (23 per cent)
  • Consolidate debt (21 per cent)
  • Buy a bigger house (18 per cent)

"While interest rates are low, it's a great time to make aggressive principal repayments on a mortgage - as many Canadians have been doing - to offset the debt you may have because of rising real estate prices," said Mr. Buttigieg. "On the flipside, Canadians should avoid the risky strategy of using low interest rates to get larger loans on more expensive homes. Given that interest rates are likely to increase in the future, there's no better time to put together a detailed debt management plan."

The BMO Wealth Institute reminds Canadians of the following debt strategies for wealth preservation and accumulation:

Emergency funds: a pool of money set aside to cover the cost of unexpected expenses or the loss of income to avoid selling investments to raise cash.

RRSP loans: borrowed funds to use as a contribution to an RRSP. The lump sum gets tax-deferred growth and the contribution if deducted directly from income.

Leveraged investing strategies: loans where interest payments provide tax benefits, including loans used to purchase or create businesses, or to acquire investment properties and other investment products.

RRIF meltdown: a strategy in which an investment loan is designed to have interest charges that are identical to the amount withdrawn from the RRIF each year. In so doing, the taxable RRIF income reported on the tax return is balanced by the deduction allowed for the interest expenses - allowing taxpayers to experience no net consequences from RRIF withdrawals.

Debt swap: turning home equity into a deductible debt by borrowing from home equity to purchase investments. This is often achieved by selling an investment portfolio to repay an existing mortgage and then taking out a secured investment loan to replace the portfolio.

To view a copy of the full report, please visit: www.bmo.com/wealthinstitute