Canadian Borrowers to Struggle Paying Bills on BoC Move
Canadians stretching their borrowing to the limit will come under severe financial pressure if the Bank of Canada starts raising interest rates, according to a study by TransUnion (NYSE:TRU).
More than 700,000 Canadians won’t be able to pay their debt payments if the central bank raises the benchmark interest rates by a quarter of a percentage point. That number of Canadians will swell to a million if the increase in interest rates touches a full 100 basis points, the study says. (Source: “Nearly One Million Canadians May Struggle When Interest Rates Rise,” TransUnion, September 13, 2016).
Advertisement
There are more than 26 million Canadians, who on average manage 3.7 credit products each. The study focused on two major types of debt that have the highest risk of being affected when the rates start to creep up.
Approximately seven million Canadian consumers carry at least one of these two variable-interest-rate debt types: lines of credit and variable-rate mortgages. Borrowers of these products may not be able to pay their bills if an increase in rates causes a simultaneous jump in variable rates, says the study. That study also says an additional 253,000 Canadian consumers might come under financial pressure if the rate was to rise by a full percentage point.
“Despite rising debt loads for Canadians, our study found that the far majority of consumers will be able to manage an interest rate hike of up to one percent,” said Jason Wang, TransUnion’s director of research and industry analysis in Canada. “Our assessment, though, identified a subset of the population of nearly one million borrowers who may face financial challenges when rates rise.” (Source: Ibid.)
The Bank of Canada has been maintaining a low interest-rate environment for many years as the world’s eighth-largest economy faces a slow-growth environment due to falling commodity prices, including oil, gold, and natural gas.
In its policy meeting last week, the Bank of Canada decided to keep its interest rates unchanged, saying that a dismal performance by the country’s crucial export sector is holding back growth. This policy has fueled a growth in consumer debt in the country, mainly in mortgages, as local and foreign buyers snap up homes and condos in the nation’s two biggest cities: Toronto and Vancouver.
