If the Bank of Canada isn’t careful, it could push many Canadians over the financial brink
As the Bank of Canada continues on its path toward normal interest rates over the next two years, Canadian consumers and households carrying record levels of debt may be pushed over a financial precipice.
A recent poll of 1,350 voting-age adults by Forum Research found that more than half of Canadians expect rising interest rates to negatively affect their personal finances, reported the Financial Post. Nearly nine years of low interest rates have not only depressed investment returns from bonds, but they’ve also pushed more people into overextending themselves.
“Rates were so low for so long, it was almost like money was free,” Forum Research president Lorne Bozinoff told the Post.
The anticipated rate hikes are of particular concern to those carrying non-fixed debt, such as variable mortgages or lines of credit. According to Credit Canada CEO and executive director Laurie Campbell, such instruments are being tapped “at an alarming rate.”
Home equity has also been a costly lifeline for many, according to Doug Hoyes from Hoyes, Michalos & Associates in Ontario. Even as they faced mounting pressure from rising home prices, many homeowners used home equity as a “get out of jail free” card to refinance and pay off unsecured debt such as that from credit cards.
All these risks are reflected by the September Forum poll, which found 12% of respondents saying they expect an extremely negative impact from higher rates — 6% higher than a similar poll done in August. Among millennial respondents aged 18 to 34, 60% are at least “somewhat concerned” by the prospect of rising rates, while 57% of those of any age with minimal wealth expressed the same sentiments.
Rate hikes were less worrying to respondents aged 55 to 64 (28%), those aged 65 and older (31%), and the wealthy (33%).
The high dependence on credit has also affected Canadians’ ability to set aside funds for a rainy day. Forum’s Bozinoff said 26% of those polled had no emergency savings, while 40% said they just had enough buffer funds for a month at most. Another 14% said they had two to three months’ worth; 9% had four to five months, and 13% had six months to a year. Among millennials, 35% had no savings at all, while 10% had less than a month’s worth of savings set aside.
Hoyes predicted that rising rates will increase the prospects of unaffordable mortgages, defaults, and consumer insolvencies. “If the real estate market weakens and interest rates increase, 2018 could be the start of a prolonged period of increases in the consumer insolvency rate.”
After the rate announcement this month, the Bank of Canada said it would monitor the economy closely to determine borrowers’ sensitivity to hikes. BMO Financial Group Chief Economist Doug Porter said that while the central bank won’t necessarily stop raising rates, he expects it “will be extremely deliberate and cautious in doing so.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Is a Canadian credit crunch in the cards?
Are Canadians saving enough for retirement?
A recent poll of 1,350 voting-age adults by Forum Research found that more than half of Canadians expect rising interest rates to negatively affect their personal finances, reported the Financial Post. Nearly nine years of low interest rates have not only depressed investment returns from bonds, but they’ve also pushed more people into overextending themselves.
“Rates were so low for so long, it was almost like money was free,” Forum Research president Lorne Bozinoff told the Post.
The anticipated rate hikes are of particular concern to those carrying non-fixed debt, such as variable mortgages or lines of credit. According to Credit Canada CEO and executive director Laurie Campbell, such instruments are being tapped “at an alarming rate.”
Home equity has also been a costly lifeline for many, according to Doug Hoyes from Hoyes, Michalos & Associates in Ontario. Even as they faced mounting pressure from rising home prices, many homeowners used home equity as a “get out of jail free” card to refinance and pay off unsecured debt such as that from credit cards.
All these risks are reflected by the September Forum poll, which found 12% of respondents saying they expect an extremely negative impact from higher rates — 6% higher than a similar poll done in August. Among millennial respondents aged 18 to 34, 60% are at least “somewhat concerned” by the prospect of rising rates, while 57% of those of any age with minimal wealth expressed the same sentiments.
Rate hikes were less worrying to respondents aged 55 to 64 (28%), those aged 65 and older (31%), and the wealthy (33%).
The high dependence on credit has also affected Canadians’ ability to set aside funds for a rainy day. Forum’s Bozinoff said 26% of those polled had no emergency savings, while 40% said they just had enough buffer funds for a month at most. Another 14% said they had two to three months’ worth; 9% had four to five months, and 13% had six months to a year. Among millennials, 35% had no savings at all, while 10% had less than a month’s worth of savings set aside.
Hoyes predicted that rising rates will increase the prospects of unaffordable mortgages, defaults, and consumer insolvencies. “If the real estate market weakens and interest rates increase, 2018 could be the start of a prolonged period of increases in the consumer insolvency rate.”
After the rate announcement this month, the Bank of Canada said it would monitor the economy closely to determine borrowers’ sensitivity to hikes. BMO Financial Group Chief Economist Doug Porter said that while the central bank won’t necessarily stop raising rates, he expects it “will be extremely deliberate and cautious in doing so.”
For more of Wealth Professional's latest industry news, click here.
Related stories:
Is a Canadian credit crunch in the cards?
Are Canadians saving enough for retirement?
