Are you among the group that will be influenced by the higher interest rates? A newly released federal analysis says that younger, middle-income households will be among those that feel the biggest financial sting from the Bank of Canada’s gradual move towards higher interest rates.
Shakespeare wrote: “ neither a borrower nor a lender be.” This may have been reasonable advice back in Hamlet’s day, but it is hard to imagine a modern economy like ours functioning under this rule. For most Canadians debt is a fact of life, at least at some point in their lives. Borrowing can help someone get a higher education, or buy a new car, or purchase a home. Put simply, debt has become a tool that allows people to smooth out their spending through their life.
The amount of debt held by Canadian households has been rising for about 30 years. At the end of last year, Canadian households owed just over $2 trillion. Mortgages make up almost three-quarters of this debt. While debt is indispensable for our modern way of life, it has been a growing preoccupation for the Bank of Canada for several years now.
When doing a recent analysis, the Finance Department looked at factors such as income, age and region, in an effort to pinpoint the types of households that will be most affected by the central banks’ ongoing rate-hiking trajectory.
Officials put a particular focus on how rising rates will start to squeeze ‘highly indebted households”, which the document described as those already carrying debt-to-income levels of at least 350%!
The document sought to answer another question: Who are these stretched households?
They most likely consist of households led by middle-income earners, Canadians over 45 years old, mortgage holders, the self-employed and those in Ontario and British Columbia. A closer look a the numbers showed that mortgages were the main factor for highly indebted households because they accounted for 85% of their total debt burdens.
In recent weeks, the central bank raised its trend-setting interest rate for the fourth time in a year, to bring the benchmark to 1.5% – it’s highest level since December 2008 – but still very low by historical standards. Governor Stephen Poloz has signalled that more rate increases will be necessary over time, thanks to the economy’s resilience, but he has stressed the process will be gradual.
If your mortgage is up for renewal, or if you have been thinking about what mortgage options may be available to you, don’t hesitate to reach out to us to discuss the different choices you may have.
Original articles: www.bankofcanada and ctvnews.ca
