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Nearly 60% of Canadians fear they won’t be able to pay off their debts as interest rates rise

The Bank of Canada’s latest rate hike — and the promise of more to come — has Canadians worried about their bottom line.

MNP’s Consumer Debt Index surveyed 2,000 Canadians in March, shortly after the Bank of Canada raised its key interest rate to 0.5%. Since then, the bank has raised its rate again, this time to 1%.

But by March, consumers were already feeling the pinch.

The survey found that more than half of respondents were already feeling the effects, with nearly six in 10 growing increasingly concerned about their ability to repay debt.

Two in 10 said they were not financially prepared for rising interest rates, and four in 10 said they could be closer to bankruptcy.

Meanwhile, inflation isn’t slowing down any time soon. The Bank of Canada expects it to average nearly 6% in the first half of 2022, and experts say the Bank of Canada will continue to raise its key rate accordingly.

And as the year progresses, with rates set to continue to rise, nearly half of respondents fear they won’t be able to cover their expenses without taking on more debt. About half said they were $200 or less away from being able to meet all of their financial obligations. Nearly a third are already there.

Grant Bazian, president of MNP, said the financial and emotional pressure expressed by Canadians in the poll will only increase as interest rates do the same. In the short term, Canadians should expect a “double whammy” of rising interest and soaring inflation until the first helps (hopefully) calm the second, he said. declared.

“I think it definitely adds fuel to the fire,” Bazian said, though he called it “necessary fuel.”

Ted Michalos, Licensed Insolvency Trustee at Hoyes, Michalos & Associates Inc., said rising interest rates often have a psychological effect before they have a financial effect. Right now, many people are being hurt more financially by the costs of food, gas and other basic necessities being hit by inflation, while future rate hikes are causing stress and worry.

But the financial impact of rising rates is imminent for many Canadians, Michalos said.

For those with variable rate mortgages, the pinch will be felt immediately, with rising rates adding hundreds, if not thousands, to their annual costs.

Those with a fixed-rate mortgage will have more time to prepare, but won’t be able to postpone rate hikes indefinitely. And the millions of Canadians renewing their mortgages over the next year will experience “sticker shock,” he said.

“When that happens it will be dramatic,” Michalos said.

Five per cent of respondents say they will renew their mortgage in the next 12 months — applied to the population of Canada, that’s two million Canadians. And a recent survey by Mortgage Professionals Canada found that nearly 40% of Canadian mortgage holders will need to renew their mortgage within the next two years.

If you’re lucky enough to have a fixed-rate mortgage, now is the time to prepare for possible renewal and the rate hike that will come with it, Bazian said. “It really depends on cash flow.”

But while a lot of noise is being made about mortgage holders, MNP found that renters were actually more likely to be concerned about their ability to pay off their debts and were more likely to say that rising rates could push them into bankruptcy.

Between low interest rates, government subsidies and overall leniency, the pandemic has seen low bankruptcy and insolvency rates, Bazian said. But he predicts this is the year many will reach a tipping point, and we’ll start to see those numbers go up.

“I think the glue that held it all together was low interest rates,” Bazian said.

If you’re worried about your financial future, Bazian said you don’t have to wait until you’re on the verge of bankruptcy to call a professional. In fact, you could benefit from debt consolidation now, he said, which could help prevent a more serious situation in the future.

Talking to a debt management professional could also help you feel better about rising interest rates, he added.

“Getting information is a way to relieve anxiety,” he said.

Interest has been virtually free for years, Michalos said, leading many to forget the double-digit rates of previous decades.

His advice is always to reduce your exposure to debt, although of course that is easier said than done.

“The less debt you have, the less exposure you have to these kinds of changes,” Michalos said.

With files from The Canadian Press


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