Winnipeg Free Press - PRINT EDITION

What about your debt if interest rates rise?

  • Print

For the last two years, Finance Minister Jim Flaherty and former Bank of Canada governor Mark Carney have repeatedly warned Canadian consumers about our high debt levels. Their biggest fears are that people won't be able to support their debt payments when interest rates go up.

This could collapse the housing market as a result of higher mortgage rates and generally reduce consumers' ability to spend and support the economy.

Are Canadian consumers really a basket case? More importantly what can you do to protect against any dangers that lurk out there?

First, let's look at how much debt Canadians owe.

The latest survey by credit bureau TransUnion found the average Canadian's non-mortgage debt was $26,935 in the first quarter of 2013. This includes credit cards, installment loans, non-mortgage lines of credit and things such as car loans and consumer loans.

This is down $500 per person from the record achieved in the fourth quarter of 2012 but up about 3.5 per cent from the same quarter in 2012.

The good news is the small drop was the largest decrease in debt since TransUnion started doing this quarterly survey in 2004.

There is no question this level of debt is a concern, and the rapid increase of it during the last few years is perhaps more alarming.

Interest rates in the last few years have allowed people to afford this level of debt, but everyone's fear is when interest rates rise, the variable interest rates that have become so popular will turn around and bite the borrowers.

It is also my gut feeling we likely have a record amount of mortgage debt currently on variable, as opposed to fixed, interest rates. That will clearly compound the problem of rising rates.

Will this affect housing prices? Most definitely. There are several markets in Canada in which the average person can no longer afford a home. Markets such as Winnipeg are approaching that level, but people can still borrow enough to purchase houses when interest rates are low. If mortgage rates are bumped up two per cent, a lot of those people would be shut out of the market, and that would certainly eliminate housing-price increases for a period of time.

A steep rise in rates would almost certainly drive prices down in overheated markets such as Vancouver and Toronto.

What can you do to protect yourself?

I do not advocate selling your house, simply because of the possibility of a moderation of prices. But I do strongly recommend you add up your total debt, calculate your current interest costs and estimate what the interest cost would be if your rate increased two per cent or three per cent. If that would cause a significant problem, consider either fixing your interest rate now or doing your best to decrease the total amount you owe as quickly as possible.

In a shameless plug for my book, Managing the Bull, there is a great section there on how to systematically attack and eliminate debt.

Most of the readers of this column are debt-free and are more concerned about the negative effect low interest rates have had on their ability to produce retirement income. If you have short-term deposits and GICs, you can hold tough and have some assurance these rates will likely rise moderately in the near future, as mortgage rates have in the last few weeks.

Holders of long-term, low-coupon bonds should be aware the prices of these investments can drop a surprising amount if interest rates rise, especially unexpectedly.

As with everything in personal finance, keep your head out of the sand, look around and plan for every eventuality.

 

Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.


David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.

Republished from the Winnipeg Free Press print edition July 5, 2013 B11

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

The Whiteboard - Jets' 5-on-3 penalty kill

View more like this

Photo Store Gallery

  • Marc Gallant / Winnipeg Free Press.  Local/Weather Standup- Catching rays. Prairie Dog stretches out at Fort Whyte Centre. Fort Whyte has a Prairie Dog enclosure with aprox. 20 dogs young and old. 060607.
  • A gosling stares near water at Omands Creek Park-See Bryksa 30 day goose challenge- Day 25– June 21, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

Do you think it's a good idea for Theresa Oswald to enter NDP leadership race?

View Results

View Related Story

Ads by Google