The Bank of Canada (BoC) is widely expected to raise its trend-setting interest rate by another quarter of a percentage point to 1.75 per cent, on Wednesday. It would be another step in the gradual move toward higher rates under the stewardship of BoC governor Stephen Poloz. And it could also nudge a growing number of Canadians burdened by debt closer to insolvency.
A recent survey by debt consultancy firm MNP found that one-third of Canadians now worry that climbing rates could move them toward bankruptcy. That’s up a whopping six percentage points since June, before the central bank implemented its second rate hike of the year in July.
Overall, more than half of Canadians say they are becoming increasingly worried about their ability to keep up with debt repayments if borrowing costs continue to go up.
“It’s been over a year now since the first interest rate increase and as rates continue to inch higher, more Canadians are feeling it,” Grant Bazian, president at MNP’s personal insolvency practice, said in a press release. “With little decrease in household debt and the pace of rate hikes expected to accelerate, we will likely see a more immediate and significant effect on borrowers with rate increases in the future.”
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After cutting rates twice in 2015 to soften the impact of recession in Alberta, the BoC reversed course in July of last year amid signs that the economy was once again on solid footing. Lower interest rates facilitate borrowing and encourage business activity, while higher rates help prevent the economy from overheating and keep inflation in check.
The BoC’s key interest rate, which influences other rates such as those on mortgages and lines of credit, has risen from 0.5 per cent to 1.5 per cent over the past 15 months. And economists expect between one and four more rate hikes in 2019.
So far, however, Canadians have continued to pile on debt. Consumer debt including mortgages reached a new high in the second quarter of the year, climbing to $1.86 trillion from $1.82 trillion in the period between January and March, according to data from consumer credit rating company Equifax. Excluding mortgages, Canadians owed $23,271 per person on average, up three per cent since last year.
Although nationwide delinquency rates remain low, there are signs that more Canadians may start missing payments on some of their debts soon.
“Consumers will have tighter cash flows as interest rates climb further, which can lead to people not paying off their credit cards in full each month,” Bill Johnston, vice-president of data and analytics at Equifax Canada, said in a statement.
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For example, the proportion of loans on which borrowers had missed payments for 90 days or more was up slightly in the period between April and June compared to the first three months of the year.
That national uptick was driven by rising delinquency rates among Canadians aged 65 and older, which rose four per cent in the second quarter of this year compared to the same period last year. Seniors were the only age group that saw delinquency rates rise, according to Equifax.
However, it was millennials who were most likely to say that they fear not being able to make debt payments (62 per cent vs. 57 per cent for gen-Xers, and 40 per cent for boomers) and that they are already feeling the pinch of higher borrowing costs (46 per cent vs. 38 per cent for gen-Xers, and 22 per cent for boomers), according to the MNP survey.
“Millennials have never experienced a time when credit wasn’t cheap and easily accessible. Some have overextended themselves on their homes and vehicle payments and are in the habit of relying on credit to cope with any kind of unexpected expense,” says MNP’s Bazian.
In general, nearly 80 per cent of Canadians of all ages said that with interest rates rising, they’ll have to be more careful about how they manage their money.
In some areas, at least, the belt-tightening seems to be already happening.
“At this point, a slowdown or less reliance on lines of credit is a positive step as the market moves through a rising rate phase,” Johnston said. “Given that they typically have variable rates, credit lines will be the first point of impact for higher interest rates and we already seeing some of that kicking in.”