TORONTO – A report by TransUnion says up to one million Canadian borrowers may not be able to absorb the increase in their monthly payments if interest rates rise by one full percentage point.
READ MORE: Lower interest rates could be the new normal says Bank of Canada
The company says that while the majority of Canadians will not be materially impacted in the near term by an interest rate increase there is a “material subset” that may be challenged.
“The size of the monthly payment shock is only one side of the equation,” said Jason Wang, TransUnion’s director of research and industry analysis in Canada.
“For some, a $50 increase in their obligations may simply be managed by forsaking a couple of restaurant dinners and eating at home, while for some others, this may mean they would not be able to fill their gas tanks to get to work.”
TransUnion estimates approximately seven million Canadian consumers carry a variable-rate mortgage or a line of credit with a variable interest rate.
The study found more than 700,000 could struggle with the increase in monthly payments related to a quarter-point hike and that rises to up to a million with a one percentage point increase.
The Bank of Canada’s overnight interest rate target has been set at 0.5 per cent since it was cut twice last year. The rate is a key variable for the big banks when setting their prime rates and the rates for borrowing like variable rate mortgages and lines of credit.
Economists don’t expect the central bank to raise its key interest rate target any time soon, but it remains well below what is considered a normal level.
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