Interest rates are rising and Canadians are already feeling the pinch in paying down their operating lines. Owing the taxman can add to the burden. The Bank of Canada’s next interest rate announcement is March 1 and for some, the trend is already uncomfortable. Debt management is key.
Canadian households have the dubious honour of being the most indebted among all the G7 countries and high household debt loads mean that any increase in interest rates can easily stretch the finances of many Canadians.
On January 18, 2018, the Bank of Canada raised interest rates by 0.25 percent to 1.25 percent, marking the third hike since last summer. All five big banks quickly followed, bumping their prime lending rates by a quarter point, to 3.45 percent. CRA’s prescribed interest rates are expected to rise by a percentage point in April; so if you owe money today; best to pay it off quickly.
The summer of 2017 saw record-low interest rates, and even with these recent increases the benchmark remains historically low. However, the Bank of Canada rate is now at its highest level since 2009, pointing to a rising trend that holds good news and bad news for Canadians everywhere. Savers will earn more on their deposits and fixed income investments such as Guaranteed Investment Certificates (GICs), but borrowers will pay more for mortgages and personal loans—a much more concerning implication.
Combined with a more stringent stress test coming in 2018 for anyone applying for or renewing a mortgage—and the fact that almost half of Canada’s mortgage holders are due to renew their mortgage in the next 12 months—interest rate hikes could cause a real shock in the housing market and the broader economy.
Perhaps of more concern than mortgage rates and accessibility are the effects of rising interest rates on those with home equity lines of credit (HELOCs). CBC reports that there is $211 billion in outstanding HELOC debt in Canada and almost 40 percent of homeowners make payments only against the interest. The average balance on the three million active HELOCs in Canada is about $70,000. With most set at variable rates, interest on these loans will rise in tandem with central bank rate hikes, making these consumers vulnerable to what seems to be the current Bank of Canada trend.
The reasons cited by the central bank for raising rates for the third time in six months were also a mix of good news and bad news. On the plus side, gross domestic product (GDP) has grown, and two very encouraging jobs reports in November and December 2017 announced a total of 160,000 net new jobs and the lowest unemployment rate (5.7 percent) since record-keeping started in 1976. The bank’s Business Outlook Survey also reflected optimism in the business community, with many companies planning to increase spending and hiring in the coming year.
However, all this good news is balanced by the uncertainty building around the future of NAFTA talks. The timing and outcomes of the trade negotiations are unknown, but the looming threat of potential tariffs—and even the U.S. unilaterally pulling out of NAFTA—could have serious negative impacts on the Canadian economy.
It’s expected that the central bank will proceed with caution, on March 1, but more rate hikes are expected in the coming months. It’s critical to understand how rising interest rates will impact your clients, particularly those who risk becoming over-extended on their mortgage or other loans. Your counsel on how to manage their debt load can help them keep their homes and financial future secure.
Additional educational resource: Knowledge Bureau’s Debt and Cash Flow Management Course
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