Increasing Stress Among Borrowers Over Rate Hikes

The recent rate hike has caused financial imbalances in the budget of many Canadians and according to the data published by MNP Consumer Debt Index, the rising rates are decreasing the confidence of consumers in their finances. Because of the current interest rate hikes, approximately six in ten Canadians (57%) have revealed that they are highly concerned about the impact of surging interest rates on their financial situation.

The benchmark rate has been increased by 75 basis points by Bank of Canada which has resulted in an increase of the prime rate, thereby affecting lines of credit and variable-rate mortgages as well. In addition, fixed rate mortgages have also increased by nearly one percentage point or 100 basis points during the past couple of months because of an increase in bond yields to an 11-year high.

The survey conducted by MNP analysed that 52% of Canadians are already feeling the effects of interest rates, while 22% of the respondents highlighted that they are not financially prepared to deal with a rate increase of one percentage point. “The affordability crisis is increasing the financial pressure on Canadian households. Many are likely to rack up more debt to keep up with the cost of living and rising interest rates – but as interest rate rise, so will the cost of servicing some of those debts, making it more difficult to pay them down.” said Grant Bazian who is the President of MNP Ltd.

Moreover, the survey also found that 5% of mortgage holders are expected to renew their mortgage in the next 12 months. Interestingly, because many borrowers obtained mortgages during the period of record-low rates, the majority of them are likely to have renew their mortgages at a higher rate. “While mortgage holders can be particularly vulnerable to interest rate changes, their acute awareness of this vulnerability will hopefully help them prepare for the potential impact of future rate hikes,” says Bazian. Borrowers who are renewing their mortgages in the next 12 months also highlighted that they are going to cautious with how they are going to spend their income as compared to the general population.

Furthermore, citizens who are living in a rented apartment or a house are not free from worry and are likely to be in a more precarious financial position. 65% of citizens who are living in a rented premise revealed that they are more concerned about their ability to repay debts as compared to the general population, and that they will be in deep financial trouble if the interest rates increase further. They also highlighted that they are more likely to go bankrupt (50% vs 39%) if the interest rates keep increasing at their current pace.