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Why no Borrower is Immune to Interest Rate Hikes

16 June 2012

We’ve all been hearing Mark Carney at the Bank of Canada warn us about rising interest rates and what those are going to do to Canadians that are heavily in debt. And while the average debt-to-income ratio for Canadians is 153 per cent, even those who aren’t in too deep will feel the crunch when interest rates inevitably rise.

Those who currently hold variable mortgages will certainly feel the crunch. The Canadian Association of Accredited Mortgage Professionals (CAAMP), an organization of Toronto mortgage brokers, has recently revealed stats showing that one-third of Canadians currently hold variable rates on their mortgage. This means that at least one-third of people will be in trouble when interest rates move, and the amount of their mortgage moves with it.

But the other two-thirds of Canadians currently holding fixed rate mortgages aren’t safe either. These individuals will need to renew their mortgage in several years, and it will be then that they’ll feel the pinch.

Stats from Revenue Canada have also shown recently that those in the age group between 31-45 have the most average debt by age group, and it’s this group that will feel the effect of higher interest rates more than any other group. This is not only because this group currently has more debt than any other (on average,) but also because this group is still in their prime retirement planning years; but they still also hold much of those mortgages, as well as much of that debt. When interest rates rise, they’ll be spending a great deal more on their mortgage and second mortgages and will be less able to save for retirement.

The good news is that, even if we are in debt that’s currently far above our heads, for the most part we’re taking on the right kinds of debt. Jeannine Bailliu, Katsiaryna Kartashova, and Cesaire Meh – all of the Bank of Canada – recently wrote a report looking at the debt of Canadians, and the reasons for that debt.

“The main driver of the rise in household debt has been home equity extraction,” the report said. “[That is] household borrowing against equity in existing homes through increases in mortgage debt and draw on home equity lines of credit.”

This falls in line with other stats, which say that since the global financial crisis hit in 2008, Canadians have been taking on more debt for productive reasons, such as home renovations and paying off high-interest debt.

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