Not all Canadians feel the pain of a rate hike. Here’s why that could change – National

One of Canada’s major banks is arguing that while most Canadians are largely insulated from the impact of the rising interest rate today, strive to get inflationary Returning to a manageable level could leave some debtors and mortgage holders in pain for years to come.

The Bank of Canada Many are expected to raise the benchmark interest rate again on Wednesday, marking the fifth time they will raise borrowing costs so far this year in an attempt to cool the economy and reduce spillover inflation. lan.

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CIBC Deputy Chief Economist Benjamin Tal argues that thanks to Canada’s household debt structure, the direct impact of a rate hike is currently limited to about a quarter of creditors, with the majority concentrated on homeowners with certain types of mortgages. .

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“When people hear about higher interest rates, they assume people will pay more. And that is not the case due to the debt structure in our economy,” Tal said.

Crush the numbers on Canada’s debt

Karyne Charbonneau of Tal and CIBC analyzed the impact of interest rate increases on Canadian household debt in an August 22 report using data from Statistics Canada.

The authors note in the report that 30% of Canadians are completely debt-free, meaning more expensive loan rates won’t affect their payments.

Many people who are in debt really don’t have a mortgage, which means their household debt comes from credit cards or loans to finance a new car.

However, credit cards already carry very high interest rates, making the impact of the Bank of Canada’s rate hike largely negligible, Tal argued, and installment loans typically have stable interest rates. throughout the term.

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So that only leaves mortgage holders — and homeowners who use a homeowner line of credit (HELOC) on their property — to feel the brunt of the rate hike.

Adjusted rate holders are certainly feeling the effects of higher rates, as the amount they pay on their mortgage increases immediately when the Bank of Canada raises its policy rate. That is also the case with interest rates on HELOC.

But 70% of Canadians with variable-rate mortgages follow a fixed payment schedule, meaning they don’t pay more each month as their interest rates go up. Instead, the amortization, or their overall mortgage life, will lengthen.

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Tal says that since 5-year fixed-rate mortgages are “dominant” in Canada, most monthly payments are being held steady through this soaring interest rate environment. He said: “Fixed-rate homeowners will only feel the sting of higher interest rates when they renew their mortgage for a few years.

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That means that this year, only a fifth of fixed-rate mortgages are affected by interest rates, along with adjustable rates and HELOC holders.

“Taking it all together, we get that of the total household debt of $2.7 trillion, nearly $650 billion (24%) face a real increase in debt. interest payments this year,” the report said.

CIBC debt chart

A CIBC analyst found that only a quarter of Canadian household debt is vulnerable to a rate hike this year.


Tal told Global News he doesn’t expect interest rates to continue to rise this past September, but that doesn’t mean other mortgage holders are out of the woods.

Instead, each year could see a wave of attacks on Canadian fixed-rate mortgagers who are extending to this new, higher-rate environment.

“The impact today is not really significant, but cumulatively, it will be,” he said.

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Those ‘on the sidelines’ feel pain

Tal concedes that even the limited impact from the rate hike could mean Canadians “on the sidelines” will “feel considerable pain”.

Mortgage rate analyst Rob McLister told Global News that Canadians took the plunge earlier this year and jumped into an adjustable-rate mortgage before the Bank of Canada started raising rates in March. could have secured an initial rate of around 1.45%, “not far from all-time lows.”

If the Bank of Canada raises market expectations for a three-quarter percentage point hike on Wednesday, that means these mortgage holders will see their rates rise by 300 basis points in the coming weeks. for seven months.

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With an average mortgage of $300,000, that equates to about $500 in monthly payments, says McLister.

“If you’re pushing your debt ratio limit, $500 a month could push you over the limit,” he said.

In fact, more than half (56%) of homeowners are concerned about their ability to cover their monthly mortgage payments, according to a recent survey commissioned by IG Wealth Management.

About 43% of Canadian mortgage owners polled after the Bank of Canada’s last rate hike in July said they weren’t sure how they would make a living, according to online survey conducted by Pollara Study.

While McLister notes that the federal mortgage stress test introduced in 2018 means these Canadians are poised to handle higher borrowing costs, should a global supply shock or As other economic disruptions forced the central bank to raise interest rates this past September to keep inflation in check, mortgage rates could still go higher.

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“So we’re talking more material pain, especially for borrowers,” he said.

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While Tal’s analysis lays the groundwork for the Bank of Canada to freeze interest rates for a year after Wednesday’s possible hike, he also told Global News that it is “absolutely possible” the bank will increase interest rates due to “external forces” during the changing global economy.

Recheck your budget as rates increase

Whether you’re feeling the pain of a rate hike today or see your renewal date approaching, experts say there are several steps you can take now to lessen the impact of interest rates. rate on its budget.

The same IG Wealth Management survey found that even as rising mortgage rates push many households to their limits, only two out of five respondents said they include mortgages in their calculations. their budget.

That came as a surprise to Alana Riley, head of mortgages, insurance and banking at IG Wealth Management.

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“That’s a big part to get rid of. In particular, for me, it’s the first thing that’s on the budget, because it’s not something that’s really flexible,” she says.

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Riley said that Canadians who have entered the housing market in the past few years may be used to a low rate environment and may experience “sticker shock” as they near renewal.

But for Canadians forced to cut spending to accommodate growing mortgages, Riley said there are few easy options right now.

While inflation There are signs that the peak could be reached in July, the cost of living remains much higher than the Bank of Canada’s two percent target. It’s also not a great time to take money out of the market or forgo contributions to registered savings accounts, she argues, as the value of those investments could drop. during this year’s market downturn and compounding losses can cost a household. long-term.

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A mortgage broker or financial advisor can offer several options to cushion the impact of rising interest rates, she notes. Longer amortization on your mortgage can reduce your monthly payments, and variable-rate mortgages can be converted to fixed at any point if interest-rate fears increase the burden on your budget.

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As the economy and interest rates continue to change, Riley recommends regularly checking your financial assumptions to make sure they hold up over the long term.

“As markets change, as things change in your personal circumstances, there are more and more reasons why you would want to go in front of your financial planner on a regular basis, just like you would with your doctor or my dentist,” she said. “This is not a one-and-done.”

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