Canadian Debtholders Fear The Worst Amidst Rising Interest Rates

With debt-to-disposable-income ratios higher than ever and non-mortgage consumer debt consistently above $20,000, it’s long been suspected Canadian consumer debt was unsustainable. However, for most people, the severity of the situation was well-masked by nearly a decade of ultra-low interest rates and lenders eager to sell them more and more credit. But following two rate hikes from the Bank of Canada last summer, the veil has been lifted and those fears have all but been confirmed. As borrowing costs are expected to continue their upward trend, many households are learning they will either need to significantly reduce their debt burden or face overwhelming financial trouble over the near and long term.

A new poll conducted by Ipsos on behalf of MNP LTD reveals 40% of Canadians worry any further interest rate increases will put them in financial trouble, while nearly the same number, 42%, say they’re already less than $200 from not being able to pay their bills every month. One in three admit they’ve already noticed their bottom line shrinking because of last summer’s rate hikes and an overwhelming majority, 70%, say they’re going to be more careful about how they spend their money moving forward.

It seems people are taking this new financial reality seriously, which is a good sign. But there is a big difference between acknowledging the problem and taking the necessary steps to fix it. The good news is interest rates are still relatively low and most households still have room in their budget to make payments against the principal value of their debts. By taking time to craft a budget and cut any unnecessary spending, they can keep their situation from spiraling out of control. The bad news is nobody knows how long that window will be open. Interest rates could rise again as early as the new year, when consumers are still reeling from the money they spent over the holidays. Taking an indefinite credit vacation, locking in interest rates now and focusing on emergency savings are recommended to prevent being sideswiped by the continued instability.

Original coverage discussing the Ipsos poll and concern amongst Canadians was published online on October 23, 2017.