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Low rates not here forever, experts warn

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Canadians have benefited from historically low interest rates for so long they consider them the norm, but eventually it will come back to bite them, warns a couple of Toronto-based money managers.

Central banks on both sides of the 49th parallel have kept interest rates marginally above zero per cent since the 2008 financial crisis in the U.S. but Canadians who haven't built in a buffer for when rates inevitably go up could find themselves in serious difficulty, said John Wilson, senior portfolio manager and co-chief investment officer at Sprott Asset Management. "That's called redlining your car," he said.

"We're at an historically high level of debt to disposable income (in Canada). It's higher than Americans had at the peak of the U.S. housing bubble in 2006," Wilson said.

Many investors are still fearful the financial sky is falling even though the S&P/TSX has been on the rise for the latter half of the year -- the index was below 11,900 in July but is hovering around 13,500 this month, said Wilson, who specializes in equities.

"It's amazing how many people are still holding a lot of cash. (The 2008 market crash) was such a traumatizing experience for people and they're sure another one is around the corner," he said.

One of the problems with low interest rates, Wilson said, is homebuyers lose sight of what they're actually paying. "They think of their house in the context of how much they can pay each month. That's a dangerous thing. What if your monthly payment rises? People buy as much as they can, and that doesn't leave them a lot of room," he said.

Consumers often consider the price of their house as a function of the monthly payment. For example, if you put down $100,000 on a $500,000 house five years ago at a five per cent, you might think today's lower rates will enable you to buy a more expensive house, say $700,000, with the same monthly payment.

"With the same down payment, you are $600,000 in debt," said Scott Colbourne, co-chief investment officer and a fixed-income specialist at Sprott. "You're making the same monthly payment but you have more to pay off. If the payment goes up, you'll get squeezed and have a lot more debt."

geoff.kirbyson@freepress.mb.ca

Republished from the Winnipeg Free Press print edition December 27, 2013 B8

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