Non-profit warns of rate implications for consumers who have been leaning on HELOCs and credit cards
The Bank of Canada's pronouncement on June 1st could only exacerbate the frustrations of Canadians already struggling to make ends meet due to the rising cost of living, according to a non-profit group focused on helping Canadian consumers.
As expected, the central bank increased the target overnight rate by 50 basis points.
Consumers with variable rate loans, particularly those with high balance home equity lines of credit (HELOCs) may find that whatever minor indulgences remaining in their budgets are quickly depleted.
Mark Kalinowski, financial educator with the non-profit Credit Counselling Society (CCS), said, "Among historically low borrowing rates, the last decade has given Canadians more experience with rate decreases than increases, so another 50-basis point jump will be a wake-up call for anyone who didn't hear the alarm sound the first time.
“Unfortunately, this reinforced our reliance on credit to make ends meet, which is now causing many Canadians a lot of stress,” he added.
Higher debt payments as a result of interest rate increases harms consumers the most. According to a recent Equifax Canada study, credit card spending is at an all-time high, but payments fell by 2.9% in the fourth quarter of 2020.
Despite expressions of anxiety or concern about their financial status, Canadians aren't doing enough to improve their situation.
Consumers returned to pre-pandemic behaviors at the end of last year, according to TransUnion Canada's Q4 2021 spending report. That only helped push Canadians deeper into the economic maelstrom that began in earnest in 2022.
"This is concerning," CCS program manager, Mason Cox, said. "Countless consumers pay their high interest credit cards, as well as other debts, off with their HELOC each month. While it might feel good that you paid your credit cards off, the clear conscience can not only lead to more spending, but also to debt that has the potential to jeopardize your home ownership if left unchecked."
An interest-only payment on a $150,000 HELOC amount might cause hardship for many families in a short period of time, as well as have long-term ramifications for leveraging their home, with an estimated 1.50% rate or around $588 in monthly payment as of June 1.
Especially given the BoC’s June 1 announcement, CCS urged consumers to pare back their spending in response to the cumulative effect of rate hikes.
