Atlantic Canadians are going to be hit especially hard by looming hikes in interest rates for mortgages, lines of credit and personal loans, says a Nova Scotia debt relief specialist.
“Atlantic Canadians are probably worse off than Canadians in other parts of the country because we have the same level of consumer debt (excluding mortgages) but we have lower incomes,” said debt relief specialist David Moffat, owner of the 4 Pillars office in Nova Scotia.
During the past year, the Bank of Canada has already raised its trendsetting rate three times, hiking it from a historically low 0.5 per cent to 1.25 per cent as of its latest move in January. Canada’s chartered banks were quick to follow suit, raising their rates by the same amount.
According to Moffat, that’s already added $750 in annual interest payments for someone taking out a $100,000 mortgage.
But that’s only the tip of the iceberg. Experts say there are likely a lot more interest rate hikes planned and set to hit Canadians later this year and the next. That means higher interest costs for anyone with a variable rate mortgage, line of credit or personal loan.
Credit card debt, which comes with interest rates of about 19 per cent and higher, usually comes with a more fixed interest rate and so is thought by experts to be less likely to be affected in the short run by increases to the Bank of Canada rate.
Matthew Stewart, director of national forecasting and analysis for the Conference Board of Canada, says the Bank of Canada will likely announce two more rate hikes of 25 basis points each this year and do the same again next year.
That scenario, if correct, would bring the Bank of Canada rate to 2.25 per cent.
“What consumers pay right now is about 10 per cent (of their after-tax income) to service that debt and the interest,” said Stewart. “By the end of 2018, it’ll be 11 per cent. So that’s a full percentage point … That’s quite significant.”
The good news is most Canadian families will be able to absorb those extra costs because they come at a time when interest rates are just coming off near-record lows, said the Conference Board of Canada’s director of national forecasts.
The bad news is that those Canadians who are already stretched thin financially will find the rising interest rates hard to handle.
“Right now, seven to 10 per cent of households are extremely leveraged. That’s the people who are in danger of defaulting,” said Stewart.
As interest rates rise, more of those Canadians who are carrying a lot of debt will likely be forced into bankruptcy or have to take other measures to stave off creditors.
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, isn’t worried for the average Canadian family that’s properly managing its finances. Many people, though, will find the interest rate hikes tough.
“It’s people who are on the edge – or close to the edge – who may be adversely affected, especially if they’re holding debt instruments with variable rates,” he said. “It could push them towards insolvency.”
Financial experts agree that many Canadians are not putting enough money aside in savings for unexpected expenses or job losses and borrowing too much.
According to Moffat, the average Canadian owes $1.71 for every dollar of income.
Many Atlantic Canadians might take some comfort in their relatively smaller mortgages compared to other Canadians. But people in this region still carry just about as much of their debt in instruments likely to be affected by the looming interest rate hikes.
According to Statistics Canada figures, 94.3 per cent of the average Canadian’s debt is tied up in his or her mortgage, line of credit or car loan. On the Rock, the comparable figure is 93.5 per cent. On Prince Edward Island and in Nova Scotia, 90.6 per cent of personal debt is tied up in mortgages, lines of credit and car loans. And New Brunswickers have about 86.6 per cent of their debt in those instruments.
Schwartz’s advice is simple: if your financial house isn’t in order, do everything you can to fix it now, before the looming interest rate hikes hit.
Pay off any outstanding balances on high-interest credit cards as quickly as possible, he says.
“The first step is to set up a system where they can put aside an amount of money every month automatically and take it out of their hands. Make it invisible,” he said. “If they can save up to 10 per cent of their paycheques, that would be great. But they may have to build up to that.”
Despite the experts’ advice, a growing number of Canadians find themselves in financial hot water and have to file for bankruptcy or put forth a consumer proposal to their creditors every year.
According to the Office of the Superintendent of Bankruptcies, the total number of insolvencies, consumer proposals and bankruptcies, rose by 1.8 per cent in Canada in January last year compared to the previous month. During the year that ended on Jan. 31, 2017, insolvencies jumped 3.4 per cent compared to the previous year.
But many individual Canadians are hurting financially with consumer insolvencies up 3.7 per cent year over year for the same time periods
The solution to a personal financial crisis, though, isn’t always a bankruptcy filing or a consumer proposal. In some cases, all that’s needed is a good debt management program.
Why does Canada need to hoist interest rates?
It’s a move deliberately designed to take money out of consumers’ pockets and slow the Canadian economy.
That means slower job growth and less consumer spending.
So why do it?
The rationale behind the Bank of Canada’s rate hikes is that higher interest rates will slow the rate of growth in the country’s economy and keep inflation in check at about two per cent, says Matthew Stewart, director of national forecasting with the Conference Board of Canada.
“The inflation rate is now below two per cent but it is rapidly approaching it,” said Stewart in an interview. “Most economists believe it’s best to keep the inflation rate at two per cent. There’s a lot more value in the economy being predictable than in the few jobs you might pick up.”
When the Bank of Canada raises its rates, the chartered banks follow suit and variable rate mortgages, lines of credit and personal loans all cost consumers more. That’s bad news to those who are carrying heavy debt loads, especially if they lose their jobs or suddenly face unexpected expenses.
But the economic growth and tight labour market that prompted the Bank of Canada to raise its rate also means those Canadians who have jobs can soon expect to see something that’s been absent for years.
Good pay raises.
“Because of the tightening job market, we’re going to see wage increases and this is going to help a bit,” said Stewart. “We’ve seen such horrible wage increases … It’s been lower than the inflation rate for the last two years.”
In 2017, the inflation rate came in at 1.5 per cent, exactly the same amount as the average pay hike. That means the average Canadian who got a raise last year finished off the year no further ahead financially.
In this region, though, raises are not expected to be as high as in the rest of the country, said Stewart.
“Atlantic Canada is suffering from an older labour force and slower labour force growth,” he said. “Most of the growth is happening in Ontario and there is a recovery underway in Alberta.”