Seniors taking on debt at alarming pace

Second properties and flashier cars are driving senior citizens into escalating levels of debt, a TD Economics paper says.

Many people 65 years old and older are borrowing to buy vacation and investment properties at a time of continued low interest rates and low returns on other investments, says the TD Economics paper released Tuesday.

Often seniors are well positioned to take such actions but they are racking up debt three times faster than the Canadian average and face risks, says TD deputy chief economist Derek Burleton.

If the real estate market falls, people can end up owing more than a property is worth.

“Many people may be of the mind that real estate is the safest investment but that’s not necessarily the case,” Burleton said in an interview.

“Real estate has outperformed (for years),” he said, “but we go through periods of weakness as well and we’re looking at an adjustment, probably in 2013.”

The paper Canada’s Aging Household Debt Burden appears as the third in a TD Economics series examining Canadian household debt.

For the past decade, Canadians across all age groups have been taking on higher and higher debt loads, the report says.

In absolute terms, the 65-and-older crowd carries the lightest debt load of any age group. Carrying the highest is the 25-44 group, often because of mortgage and other family-related costs.

The No. 1 debt driver across all groups is housing.

No. 2 is cars.

“Canadians on average have either increased the number of cars they own or are driving a more expensive car,” the report says.

In the last five years, the automobile assets held by the average Canadian household jumped to $20,000 from $15,000, it says. At the same time, the cost of owning or leasing a car has declined by 10 per cent.

The youngest (18-24) and oldest (65+) age groups account for the highest increase in vehicle spending, the report says.

Lines of credit have also gained popularity across all age groups, figures show, partly because such financing offers low short-term interest rates and flexible payment options.

While mortgage debt accounts for about three-quarters of average household debt, the paper says, lines of credit have been the growth leader, especially since 2007.

Young people often use lines of credit as student loans. Seniors sometimes borrow with them to make home renovations rather than cash in securities when the market is low, economist Burleton said.

The time-honoured personal-finance rule, “Don’t bring debt into retirement,” appears to be changing along with other traditional rules that applied to older people, he said.

“People are living longer and working later, they enjoy working and they may take on more debt,” the economist said.

“This is part of a bigger shift and having debt is not necessarily a bad story,” he said. “It depends on the financial situation of the household.”

While the TD reports have been warning that household debt accumulation has become excessive in Canada, the latest paper indicates a recent moderation of the trend, at least temporarily.

Tighter rules on mortgage lending in the last few years, including a required 20 per cent down payment on rental properties, cooled some borrowing, the paper says. Recent turmoil in the financial markets has also made borrowers more cautious.

“From a longer-term perspective, a continued appetite for debt (is predicted) among the fastest-growing age segment (65+),” the paper says.
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