OTTAWA — Seniors are being lured by low interest rates into piling on more debt like younger Canadians — with possible impact on their future living standards —suggests a new paper on household finances.
The TD Bank report released Tuesday, the third in a series, confirms that Canadians are piling on debt like never before. The latest figures from Statistics Canada shows that debt to income rose to a record high 149 per cent in the second quarter.
But the surprise is that Canadians 65 years and older are among the most active in the credit market.
“Younger Canadians, many of whom enter the housing market for the first time, continue to record the largest debt burdens,” noted the paper authored by Derek Burleton, the bank’s deputy chief economist.
“However, the bigger surprise surrounds the increasing indebtedness of those in or nearing retirement. In particular, the 65-plus age group racked up debt at three times the average pace” over the past decade.
As well, seniors, have been acquiring debt at double the pace of the value of growth in their assets.
Burleton says this may not be all bad, although it does add to risks that seniors will face financial difficulties in their retirement years.
With a squeeze on the value of their investments in recent years and rising food and energy costs, many seniors have resorted to so-called reverse mortgages to help finance their lifestyles.
Such loans are becoming increasingly popular and allow people over 55 to borrow against their home’s equity to get money for renovations, travel, paying off other debts and day to day living expenses.
Borrowers keep full ownership of their homes and can continue living in them with no repayments until they sell or move out. However, the debt piles up.
In the TD report,Burleton said seniors generally have lower overall debt and larger asset bases on which to fall back on.
As well, much of the debt appears to be going into purchases of real estate, including second properties, and debt used to fund asset accumulation is more sustainable than taking on debt to buy consumer goods.
Still, the paper points out that seniors risk over-extending themselves, since property values go up and down, but debt remains.
And not all the debt is going into real estate. The research shows seniors have also been buying more, or more expensive automobiles.
With low savings rates, inadequate pensions, volatility in the stock markets and longer life spans needing to be financed, Burleton says studies show that many seniors already face the prospect of a declining standard of living.
“Holding debt just adds an element of uncertainty over the financial outcomes of these older people,” he said.