Dove: Money and Household Debt Essay

Submitted By GurkiranGd1
Words: 1011
Pages: 5







Household debt holding is on the rise in terms of numbers of households that have outstanding liabilities, of numbers of credit instrument available and used, in terms of total debt owed (both in levels, and relative to income). While the bulk of credit to household is extended in the form of mortgages, unsecured credit has been some of the most spectacular growth rates.

The demand for credit, however defined, is ultimately derived from the underlying plan for consumption and its deviation from incomes and expenditures. From the life-cycle point of view, equalization of discounted marginal utilities of consumption over time implies positive demand for credit at times when current income and liquid assets (accumulated by past savings) fall short of consumption wishes. This also includes the case where expenditure and consumption are desynchronised, such as in the case of durable goods purchases. In general, demand for credit depends on characteristics of the income path (in particular, timing, volatility and growth), and of the attitudes of consumers towards risk and time. Just like savings can be spent later, debt entails repayment, hence interactions between time preference and income growth are of course similar as regards household liabilities and household assets. Households use credit to finance purchases of durable consumer goods and houses, and they use it to bridge temporary drops in income, for instance over the business cycle. For different purposes, different types of credit with varying characteristics have become available and households use them to address specific needs.

Canadians’ overall debt-to-income ratio is now 151%, greater than ever. The debt problem arises when customers don’t plan to pay it back on time, when they don’t understand what kind of debt fits to scenario and when there is no control over spending and then the option left is with borrowing too much from banks, other financial institutions. Canadians who spend 40% or more of their incomes servicing debt are on the road to financial trouble.
Mortgages are chiefly signed for housing purchases or real estate and occasionally for purchase of big-ticket items with non-trivial resale value, such as cars. Interest rates are low if repossession is possible and not too costly; typically, interest rates are flexible or fixed over certain time intervals. Length of periods of fixed interest rates is an important institutional feature that varies across countries and over time. Likewise, municipal insurance against repayment default is sometimes offered; again, this is a country-specific aspect. A mortgage’s maturity depends on the item’s useful life, but also varies considerably across countries.

The household debts are on increasing rates due to big mortgages and line of credit, and the saving rates of individual near zero. So most of individual are trapped with buying houses on low rates mortgages.

The issue is rise in household debts with low rate mortgage service provided from the bank . Avery Shenfeld CIBC economist noted recently, much of the growth in household borrowing is coming from those who already have high debt burdens, not “less indebted families getting drawn to the punch bowl by the promise of low [interest] rates”. The line of credit or plastic card services provided from the bank are suppose to be used at times of emergencies but most of individual use it for big-ticket costs and huge purchases so at end they fail to pay back amount on time, this makes them bad debts. The best solution is to borrow money at low rates, pay on time and have sensible expectations. If the