The Bank of Canada (BoC) will tell us tomorrow whether it will raise or lower interest rates — or leave them untouched. And while the overwhelming expectation among economists is that things will stay as they are, a growing number think that BoC governor Stephen Poloz may signal that the bank is contemplating a future rate hike.
Many of the big banks expect that increase to happen in the first half of 2018.
Are you ready for it?
If you aren’t, you’re not alone. Half of Canadians would be concerned about their ability to pay their debts if rates were to go up, according to a new Ipsos poll conducted on behalf of MNP Debt, one of the largest personal insolvency practices in the country. One in three said higher interest rates could “move them towards bankruptcy.”
Atlantic Canadians (61 per cent) and Ontarians (59 per cent) are most likely to worry about their debt load if interest rates rise. In Alberta the share was 55 per cent, in Quebec 48 per cent. Saskatchewan and Manitoba came in at 43 per cent, while B.C. stood at 38 per cent, according to the poll.
Bankruptcy risk was seen as highest in Atlantic Canada (46 per cent), followed by Ontario (39 per cent), Alberta (39 per cent), Quebec (35 per cent), the Prairies (30 per cent), and B.C. (20 per cent).
The poll, which surveyed a sample of 1,500 Canadians, was conducted between March 27 and March 30, 2017. It is accurate to within +/ – 2.9 percentage points, or 19 times out of 20, had all adult Canadians been polled.
Douglas Hoyes, a licensed insolvency trustee at Kitchener-Ont.-based Hoyes Michalos, expects to see a surge in insolvency filings if rates start to rise.
“Right now because carrying costs are low, we can carry more debt,” he told Global News.
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Insolvency filings are at a 15-year low in Ontario, according to a recent survey by Hoyes Michalos, but that would likely change if the cost of carrying debt were to rise even slightly, Hoyes noted.
What an interest rate hike actually means for your pocketbook
The thing people need to understand is that a 1 percentage point rise in interest rates doesn’t mean your interest rate goes up by 1 per cent, Hoyes said.
Imagine you have a variable-rate mortgage with a 3 per cent interest rate, continued Hoyes. Variable mortgage rates are generally tied to the general level of interest rates. Now, say your variable rate goes from 3 per cent to 4 per cent. That’s an increase of 33 per cent, not 1 per cent.
What that does to your monthly mortgage payments depends on what portion of them goes toward interest versus the principal, but many Canadians would likely face an increase of several hundreds of dollars per month.
Lines of credit are another popular financial product that often carries variable rates influenced by the general level of interest rates, noted Hoyes.
It’s unlikely the Bank of Canada would initially raise rates by 1 percentage point. The last time the bank moved interest rates by more than 0.25 of a percentage point was 2009, and economists expect rates to come up gradually and slowly.
Still, many Canadians would likely struggle to absorb even a small increase in their interest rate charges. According to a recent Ipsos poll conducted for RBC, one-third of Canadians say they would worry if their mortgage payments went up by 10 per cent or more.
Start paying off your debt now
“Consumers must start paying down debt now while interest rates are low. It will get more expensive – and for some it will be unaffordable – when interest rates rise,” Grant Bazian, president at MNP Debt said in a statement.
Hoyes agrees. Paying off debt while interest rates are low also means “more of your dollar goes toward the principal,” he noted.
“Now is the time to pay down your debt,” he said.
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