More than seven in 10 Canadians rate their ability to budget for an interest rate increase of one percentage point as ‘less than optimal,’ a nationwide survey found.
The prospect of climbing rates has nearly half of Canadians on edge, according to a recent Ipsos poll conducted by MNP, which runs one of the largest personal insolvency firms in Canada.
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A staggering 77 per cent of survey respondents said they would struggle to absorb an additional $130 per month in interest payments on debt, the study shows.
Global News has calculated that a one percentage point rate hike would work out to $130 more in monthly debt servicing costs on average for a family with Canada’s median household income of $78,870.
READ MORE: Rising interest rates could cost the average Canadian $130 a month more in debt repayments
The Bank of Canada is widely expected to raise its trend-setting interest rate on July 12, the next date when it is set to review its monetary policy. Economists forecast a hike of just 0.25 of a percentage point (from 0.5 per cent to 0.75 per cent), but many foresee the central bank gradually lifting rates by a full percentage point by the end of 2018.
“Canadians should be bracing themselves for some major financial changes ahead,” Grant Bazian, president of MNP’s insolvency practice, said in a statement.
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“We’ve been living with this ‘minimum payment mentality’ for far too long. Collectively we need to start looking critically at our debt loads and factoring in interest rate changes to see if the debt amassed is even affordable,” he added.
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Homeowners particularly concerned
Many Canadians with a mortgage are already stretched thin, with one-quarter saying they are “in over their head” with their current mortgage payments.
Surprisingly, Quebecers were the most likely (35 per cent) to feel squeezed by their current home debt. One in three said the same in British Columbia and Alberta said the same, while the reading was 25 per cent in Atlantic Canada. Current payments are a concern for 23 per cent of mortgage holders in Saskatchewan and Manitoba. That number was only 21 per cent for Ontarians, despite the fact that home prices soared earlier this year in the province’s south.
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But worries around homeownership go beyond mortgage payments, the survey found.
Half of Canadians also said they are apprehensive about how homeowners would be affected by declining home prices.
Although the survey didn’t draw a link between higher interest rates and falling property values, higher interest rates could cause home prices to stagnate or decrease.
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Three in 10 homeowners predict they would be faced with financial difficulties if the value of their homes went down.
“Many are borrowing against their homes and using them to finance lifestyles they simply can’t afford. What’s worse is that many are not making regular payments against the principal, and the threat of an increase in interest rates might make it even harder to make ends meet,” said Bazian.
But even if prices simply flat line instead of declining, Canadians who’ve been using home equity loans to refinance heavy debt loads may get into trouble.
READ MORE: Home prices to remain flat across Canada in 2018, says RBC – is this the new normal?
Homeowners with only 4-5 per cent of equity in their homes might actually lose money if they tried to sold their home in an environment in which home prices have stopped rising, Global News previously reported. That’s because fees and other costs related to the sale itself would be larger than the value of the seller’s equity stake in the home.
In 2016, nine in 10 Ontario homeowners who sought creditor protection had very little equity in their homes, with the average mortgage debt amounting to 85 per cent of net realizable value of their home (which is the sale price minus the applicable fees and costs), according to Ontario-based debt management firm Hoyes Michalos.
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