- Originally from our sister publication, Advisor.ca.
There’s yet more evidence that Canadians are clueless about when they might realistically be free of debt. And the current low interest rate environment is to blame for that, according to consumer debt survey by Manulife Bank of Canada.
Survey results indicate more than one in three Canadian homeowners aged 30-39 perceive current interest rates as the norm or even high. The mistaken belief may be setting them up for future financial difficulties.
“It’s concerning that many younger homeowners believe today’s interest rates are normal when, in fact, they are near historic lows,” said Doug Conick, president and CEO of Manulife Bank of Canada. “These younger homeowners may be taking on more debt than they will be able to afford if interest rates rise. While there is no expectation we’ll see rates like those of the 1980s, a rise of even a few percentage points could have a significant financial impact on this younger generation of Canadians.”
While a third of respondents were unaware that interest rates are near historic lows, more than half expected to be debt-free by the time they’re 50, while fewer than one in five participants aged 50-59 actually report being debt-free.
Although being debt-free is a high priority for those Canadians who are aggressively paying down debt, the survey found many lacking in the knowledge of debt fundamentals.
The survey results identified some common gaps in the knowledge of Canadian homeowners, including the current level of interest rates, factors that can impact their credit rating, the value of debt consolidation and the ability to calculate interest payments.
When asked how large of a mortgage they could take out on a $200,000 home without being required to purchase mortgage insurance, only 33% of respondents chose the correct answer.
Only 15% of respondents knew that interest on a loan used to purchase a non-registered investment is generally tax-deductible.
Almost two in three incorrectly believed that changing jobs would impact their credit rating.
“I think a common assumption is that managing debt and day-to-day finances is easier and less complex than other aspects of personal financial planning,” said Conick. “However, the knowledge gaps we found shed light on why Canadians struggle to reduce their debt burdens, despite consistently reporting that the reduction of personal debt is a high financial priority.”
Without a foundational understanding of personal finance issues, making effective financial choices is undoubtedly challenging, he added.
The survey also showed that only 48% of respondents had reduced their personal debt over the last 12 months, down from 57% in last quarter’s survey results. Not surprisingly, fewer than half of respondents indicated they were very happy with how they had managed their debt and day-to-day finances over the past year.
Debt reduction continues to be a top priority for homeowners of all ages; 75% of those polled said that debt-freedom is one of their top financial priorities.
The study found more than half of those surveyed failed to consider consulting with a personal finance professional as part of their debt-reduction approach planning. Yet, when asked who they would most likely turn to for financial advice, the largest number said they would approach a financial advisor.
“On the whole, the results show that Canadians are focusing on the right kinds of issues when it comes to their finances, but are missing or misinformed about key debt management concepts, making the achievement of their goals challenging,” said Conick. “For those committed to reducing their debt, a conversation with a financial advisor could make a big difference.”
The poll surveyed 1,000 Canadian homeowners between ages 30 to 59 with household income of more than $50,000. They were asked a number of questions to gain an understanding of Canadians’ attitudes and behaviour on consumer debt and their level of debt knowledge.