Almost 60% of Canadians concerned about not being able to pay debts as interest rates head upward

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This article was published 18/04/2022 (885 days ago), so information in it may no longer be current.

The latest Bank of Canada 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, not long after the Bank of Canada raised its key interest rate to 0.5 per cent. Since then, the bank raised its rate again, this time to one per cent.

But in March, consumers were already feeling the pinch.

The survey found that more than half the respondents were already feeling the effects, with almost six in 10 growing more concerned about being able to pay their debts.

Two in 10 said they aren’t financially prepared to deal with rising interest rates, and four in 10 said they may be driven closer to bankruptcy.

Meanwhile, inflation isn’t slowing down anytime soon. The Bank of Canada expects it to average almost six per cent in the first half of 2022, and experts say the BoC will keep raising its key rate as a result.

And as the year marches on, with rates expected to keep going up, almost half of respondents are worried they won’t be able to cover their expenses without going further into debt. Around half said they are $200 or less away from not being able to meet all their financial obligations. Almost a third are already there.

Grant Bazian, president of MNP, said the financial and emotional pressure Canadians expressed in the survey will only go up as interest rates do the same. In the short term, Canadians should expect a “double whammy” of rising interest and skyrocketing inflation until the former (hopefully) helps calm the latter, he said.

“I think it’s definitely adding fuel to the fire,” said Bazian, though he called it a “necessary fuel.”

Ted Michalos, a licensed insolvency trustee at Hoyes, Michalos & Associates Inc., said rising interest rates often have a psychological effect before they have a financial one. Right now, many people are affected financially more by the costs of food, gas and other necessities affected by inflation, while future rate hikes are causing stress and worry.

But the financial impact of rising rates is just around the corner for many Canadians, said Michalos.

For those with a variable-rate mortgage, the pinch will be felt right away, with rising rates adding hundreds or even thousands more to their annual costs.

Those with a fixed-rate mortgage will have more time to prepare, but can’t stave off the rate hikes forever. And the millions of Canadians renewing their mortgages in the next year are in for “sticker shock,” he said.

“When that does hit, it’s going to be dramatic,” said Michalos.

Five per cent of respondents say they’re going to be renewing their mortgage in the next 12 months — applied to the population of Canada, that’s two million Canadians. And a recent survey from Mortgage Professionals Canada found that almost 40 per cent of Canadian mortgage holders will have to renew in the next two years.

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

But while much ado is made about mortgage-holders, MNP found that renters were actually more likely to be concerned about their ability to pay down their debts, and were more likely to say that rising rates could move them toward bankruptcy.

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

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

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

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

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

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

His advice is always to reduce one’s exposure to debt, though of course that’s easier said than done.

“The less debt you’re carrying, the less exposed you are to those kinds of changes,” said Michalos.

With files from The Canadian Press

Rosa Saba is a Toronto-based business reporter for the Star. Follow her on Twitter: @rosajsaba