It has been more than a year since the Bank of Canada (BOC) began an increase in interest rates.
In July of 2017, we saw the first increase when interest rates went from 0.5% to 0.75%. Since then, the rate has gone up to 1.75%, and experts speculate it will rise even more in 2019.
Even before the initial increase, there was much speculation about how the hike would affect Canadians. For instance, a September 2016 report from TransUnion estimated that one in six Canadians would owe an extra $50 per month if rates rose a quarter of a percentage point.
They also speculated that another 253,000 Canadians on top of that would go under if the rate increased by a full percentage point.
Rates did rise a quarter of a percentage point, and it has now risen by more than one full percentage point.
Hindsight is, of course, 20/20 and with that in mind we’re looking at the speculation vs. what has actually occurred in the Canadian economy since the increase in interest rates. Here is what we’ve found:
- Canadians have not hit financial ruin, but some could be hurting.
The Finance Department found in July of 2018 that those already carrying debt-to-income levels of at least 350% (currently held by about 12% of all Canadians) will start to feel the interest rate squeeze.
These households most likely consist of middle-income earners, Canadians under 45 years old, mortgage holders, the self-employed, and Ontario and B.C. residents.
In January of 2018, a national survey by Ipsos on behalf of MNP found that:
- One-third of Canadians said they were now unable to cover their monthly bills while keeping up with debt repayments.
- Households making ends meet had around $630 left at the end of the month, down nearly 30% (from $890) in July of 2017.
- 48% of respondents said they were within $200 of not being able to meet their financial obligations
- Mortgage arrears have stayed steady, or even decreased.
The Canadian Bankers Association found that the national percent of mortgage arrears to total number of mortgages has stayed low, at 0.23% — a slight decrease from 2017. Ontario’s rate in particular is quite low, at 0.09%.
- The Canadian economy has improved.
Canada saw its strongest monthly jobs gain this past September. The unemployment rate is hovering near a four-decade low. We have also seen the first international trade surplus in almost two years amid a recent recovery in exports.
- But the Canadian economy could also be slowing down.
The Deloitte Economic Advisory anticipates the Canadian economy will gear down in 2019 and fall to 1.4% by 2020.
With higher interest rates, consumer spending will no longer drive the economy, so if there is a slowdown in other areas there won’t be much room for compensation.
Economists from National Bank, TD Bank, and Manulife told The Financial Post that they estimate the risks of higher interest rates will be felt more around 2020 as many mortgage borrowers have fixed-rate loans for terms of up to five years. Rate increases over the past year will not affect their payments for a while.
- Insolvency rates have stayed steady.
In the first and second quarters of 2018, Canadian insolvency statistics had stayed on par with 2017. The total number of insolvencies are slightly down, as are the total number of bankruptcies filed. But the total number of consumer proposal filings were slightly up.
- But household debt is creeping higher.
Statistics Canada found that in the second quarter of 2018, Canadian household debt vs. income increased to 169.1%. In other words, Canadians owed $1.69 for every $1 of disposable income.
The rate was up from 168.3% in the first quarter of 2018, but down from 169.7% in the second quarter of 2017.
While the effect of higher interest rates seems to be minor, so far at least, that could change in the next year. If rates continue to increase, it will become more difficult for Canadians to make ends meet, spend disposable income, and perhaps even qualify for mortgage rates.
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