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September 24, 2018 September 24, 2018

Debt load concerns

Posted on September 13, 2017 by Lethbridge Sun Times

Compared to news of Hurricane Irma and its potential to devastate South Florida once it finishes wreaking havoc on islands in the Caribbean, last Wednesday’s announcement of another rate hike by the Bank of Canada likely attracted little interest among the Canadian public. But it was a sign of possible storm clouds on the financial horizon for Canadians carrying a risky amount of debt.
The central bank hiked its rate by one-quarter point to 1.0 per cent, marking the second 25-basis-point increase since July after no increases since 2010. It prompted financial experts to send a warning to Canadians to start considering their debt load and whether it is sustainable if conditions change.
In a story Wednesday from The Canadian Press, Patricia White, executive director at Credit Counselling Canada, said that after years of increased borrowing at low interest rates, many people aren’t prepared for the higher costs that could be coming if interest rates continue to rise.
“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 said.
Eric Kam, an associate professor of economics at Ryerson University, said the federal government is looking to temper the housing market by raising interest rates.
“I think this is really in a sense an earbug on behalf of the government to put it into people’s minds to say just be wary of your debt load,” Kam said.
Consumer credit reporting agency Equifax Canada released a report Tuesday showing that debt loads have been increasing and are now at record highs, reaching $22,595 per person in non-mortgage debt.
An Equifax spokesperson noted debt levels are so far sustainable, with delinquencies and bankruptcies actually on the decline, and added that interest rates at present could add $50 to $150 a month to a household, which most will be able to handle.
But RBC CEO Dave McKay, addressing a financial summit in Toronto on Wednesday, noted that increased payments on mortgages and other debts could slow the economy as consumers wind up with less disposable income to spend on other things.
As citizens have been relying on historically low interest rates to finance homes and other major purchases on credit, it has led to many Canadians carrying debt levels that might not be sustainable in the event of higher interest rates. In June, when the Bank of Canada was pondering a rate hike, B of C governor Stephen Poloz suggested that Canadians should be thinking about what their finances would look like in a scenario of higher interest rates.
Around the same time, TD Bank economist Diana Petramala said in a note to clients, “While indebtedness has recently stabilized for Canada as a whole, it still remains elevated, leaving households particularly sensitive to rising rates.”
With interest rates starting to edge upward, it might be a good time for Canadians to examine their debt loads and make changes before possible storm clouds arrive.

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