Rising interest rates a warning to consumers on cost of high debt loads
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CALGARY — The Bank of Canada's second interest rate increase this summer has financial experts warning that more could be on the way, and now is the time for Canadians to take a serious look at their debt.
Patricia White, executive director at Credit Counselling Canada, says years of increased borrowing at low interest rates means many people aren't prepared for the higher costs that could be coming.
"Everyone needs to look at where they're at, because we suspect that the Bank of Canada governor is just going to continue to do this."
White says the growing use of home equity loans and lines of credit means more Canadians are exposed to immediate changes in borrowing rates, while those thinking about buying a home need to take a prudent look at what they can afford to pay.
"The point is people need to get their head out of the sand and take a look at things. We've had that nice lull over several years — now reality hits."
The warning comes as the central bank hiked its rate Wednesday by one-quarter point to 1.0 per cent, its second 25-basis-point increase since July and the first round of increases since 2010.
The rate increase means about $50 more a month for an average $480,000 home in Canada on a variable-rate mortgage, said Janine White, vice president of RateSupermarket.ca, while Toronto's higher average housing price of $670,000 means the increase would be about $80 a month.
"What you need to look at is the compounding of it," said White. "If you paid an extra $80 in July on your mortgage, and now you're paying another $80, and economists are thinking that this will go up again, it's about understanding what you can manage when you look out to the future."
She said those with fixed-rate mortgages won't be affected until their rate comes up for renewal, but they should start planning now for the potential shock of higher rates when they do.
Eric Kam, an associate professor of economics at Ryerson University, said the government is using the increase in interest rates to temper the housing market.
"It's the government saying, so many people have been investing in things that they may or may not sustain if rates go up. So let's let rates rise a little bit and let's see what of this is solid, and what drops to the wayside."
Kam says the rise in rates so far would likely not stop anyone from buying a home, but they may consider a smaller one.
"I think this is really in a sense an earbug on behalf of the government to put it into peoples minds to say just be weary of your debt load."
Equifax released a report Tuesday that showed those debt loads have been persistently increasing, and at $22,595 per person in non-mortgage debt, are now at record highs.
Regina Malina, senior director of data and analytics at Equifax, said delinquencies and bankruptcies have been dropping despite the rising levels, showing that so far debt levels are sustainable.
She said that on a general level, the increase in rates so far could add $50 to $150 a month to a household, which is a slow enough change that most people will be able to adjust.
RBC CEO Dave McKay, speaking at a financial summit in Toronto Wednesday, however, said increased payments on mortgages and other debts could hit the economy as people have less disposable income to spend elsewhere.
"That's one of the effects that we don't talk enough about. As rates rise, as they did this morning, a greater amount of disposable income is coming out of purchasing power, which will slow down economic growth in other sectors. And that's not a healthy thing in the long term."
- With a file from Armina Ligaya in Toronto
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If you want to be able to cope with life’s little surprises you have to first know exactly where your money is going.
Take stock of your debts and devise a plan to pay them off while saving as much on interest as you can.