Rate cut isn’t a green light for consumers to borrow more: experts

“This shouldn’t be seen as an opportunity to say, ‘Great, rates are lower I can now take on a bigger mortgage," Hannah said.
“This shouldn’t be seen as an opportunity to say, ‘Great, rates are lower I can now take on a bigger mortgage," Hannah said. THE CANADIAN PRESS/Darren Calabrese

Is the Bank of Canada’s surprise decision to cut its trend-setting interest rate a ripe chance for borrowers to get a grip on what they owe, or a tempting offer to plunge them further into debt?

Experts say both. How you navigate a lending environment where interest rates are about to get even cheaper will determine whether you’re putting yourself on sounder financial footing, or closer to the ledge.

“We look at this as a positive for consumers, an opportunity to get their financial house in order,” Scott Hannah, the president of Credit Counselling Society, a non-profit agency, said. “If it’s used properly.”

The Bank of Canada’s decision to drop its key rate 25 basis points (or a quarter of a percentage point) to 0.75 per cent from 1 per cent means interest payments on loans offered by private lenders like big banks and credit unions will get even cheaper.

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Hannah said he expects loan products offered by lenders to start reflecting the cut almost immediately. That will give many consumers the ability to re-negotiate lower payments on their existing debt, while paying it off more quickly.

“It’s good news for those who’ve got variable rate mortgages, lines of credit or those about to renew their mortgages,” he said.

But there’s also a new danger. “On the flipside, it encourages people to take on more debt.”

The flipside is what’s causing some concern.

MORE: 4 charts that show ‘Canada is in serious trouble’

Credit boom

Average Canadian debt levels are sitting at record highs, with consumers loading up on mortgage debt and other forms of credit such as auto loans since before the recession. The downturn saw rates plummet to record lows, sustaining what’s become a record borrowing boom in Canada.

That unprecedented debt bulge however has left at least some Canadian households vulnerable to a financial shock such as a job loss. And piling on more – even at cheaper interest rates – would be a bad idea, experts say.

“I’d strongly caution consumers, the Bank of Canada is telling us something; the economy is slowing down,” said Dave Nugent, portfolio manager for Wealthsimple, an investment management company in Toronto.

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“This is not a time to gorge on more debt. This is a time to take advantage of paying down debt at a cheaper rate,” Nugent said.

MORE: Canadians pile on more debt, while U.S. households pay it down

The Bank of Canada has cited excessive debt levels as the biggest domestic risk to the economy, reiterating again Wednesday that “household imbalances [in debt levels compared to incomes] will remain elevated,” it said.

Bigger mortgage?

And the bank now expects household debt levels to rise higher still because of the rate cut – something it deems less threatening to the economy than the risk of recession posed by crashing oil prices, which would tip far more people over the ledge.

But experts say borrowers would be wise to try their best to prove the bank’s prediction wrong.

“This shouldn’t be seen as an opportunity to say, ‘Great, rates are lower I can now take on a bigger mortgage,” Hannah said.

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WATCH: The Bank of Canada’s overnight interest rate sets the tone for mortgage rates. Wednesday’s rate cut may be an incentive for some to jump into the housing market. Reid Fiest explains.

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