Canadians are feeling more pessimistic about their personal finances, despite declining interest rates — and more are closing in on insolvency now than before.
The latest quarterly MNP Consumer Debt Index dropped 10 points to 79 points, marking the second-lowest level on record since the Index’s inception in 2017. Canadians’ personal debt rating has plunged to an all-time low, marking a sharp 12-point decline from the previous quarter.
The only other time personal debt rating reached close to this low point was in December 2022.
“While interest rate cuts last year provided some initial relief from their financial worries, Canadians are starting the New Year with holiday bills arriving and a more pessimistic view of their finances,” Grant Bazian, president of MNP, said.
Economic uncertainty is reflected in Canadians’ pessimistic outlook on their financial future. Fewer Canadians this quarter expect their debt situation to improve one year from now (27 per cent, down four points), while a growing number anticipate it will worsen (19 per cent, up seven points). Alongside this, job anxiety has reached an all-time high, with two in five (41 per cent, up nine points) worried someone in their household could lose their job. Moreover, half of Canadians (51 per cent, up five points) believe they will not be able to cover all of their living and family expenses in the next 12 months without going further into debt.
There was a sharp increase in the number of Canadians teetering on the edge of financial insolvency compared to last quarter, with half (50 per cent, up eight points) now indicating they are $200 or less away from not being able to pay their bills and debt payments each month, an eight-point increase since last quarter. One-third say they are already insolvent (35 per cent, up nine points).
“Many Canadians are already tightening their finances, reassessing budgets, and exploring cost-cutting measures to manage rising living costs or debt repayment. Unfortunately, in some cases, even substantial sacrifices may fall short of providing meaningful financial relief even in the lower interest rate environment,” Bazian said.
Despite consecutive interest rate cuts in 2024, Canadians’ attitudes towards their finances and interest rates have worsened this quarter. Half of Canadians (50 per cent, up two points) are still concerned about their ability to repay their debts, even if interest rates decline. Nearly half (46 per cent, up four points) are concerned that rising interest rates could move them towards bankruptcy, while two-thirds (65 per cent, up two points) say they desperately need interest rates to go down.
In line with these concerns, the financial cushion for many households is eroding as disposable income shrinks, leaving less room to manage unexpected expenses. This quarter, Canadians have on average $147 less left over at the end of the month, decreasing to $790.
“Less wiggle room leaves households vulnerable to unexpected expenses or the impacts of economic changes,” explains Bazian. “For those already living paycheck to paycheck, any financial disruption could quickly escalate into a crisis.”
As financial pressures mount, Canadians’ ability to absorb an extra $130 in interest rate increases has deteriorated. The possibility of unexpected expenses or life changes also weighs heavily on Canadians, with one-third (33 per cent, up seven points) expressing a lack of confidence in their ability to cope with an unexpected auto repair or purchase.
Image credit: Depositphotos.com
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