Winnipeg Free Press - PRINT EDITION

What about your debt if interest rates rise?

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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

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