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Canada Debt Survey: A Third Of Canadians Can't Make Their Monthly Payments

Daniel Tencer

As Canadians prepare for a possible interest rate hike from the Bank of Canada this week, a new study is warning that the country's indebted consumers are increasingly struggling to keep up with their expenses.

One-third of Canadians say they are no longer able to cover their monthly bills and debt payments, according to a survey carried out by Ipsos for insolvency consultancy MNP, up from 25 per cent in a survey three months earlier.

Half of respondents said they are within $200 of not being able to pay their bills, up six percentage points since the last survey.

"With interest rates on the rise, Canadians are more stretched financially than they have ever been before," MNP President Grant Bazian said in a statement. "I wouldn't say we're at a major tipping point yet, but likely not far off."

With interest rates rising, Canadians are seeing less cash left over after paying their bills. The average household had $631 left over after monthly bills and debt payments in the December survey, down from $743 in September, and $892 in June.

Millennials, Gen-Xers face greatest pressure

Four in 10 respondents said they fear they would be in financial trouble if interest rates rose even a little bit. But fully half of millennials and Gen-Xers say the same, the study found.

"We have a whole generation of Canadian consumers who have never experienced anything but rock bottom interest rates, and many of them have financed everything in their lives — from education, to houses, to cars, and even everyday purchases — without really putting much thought into debt servicing costs," Bazian said.

"On top of that, low returns for savers has undermined the notion that saving is a worthwhile activity so most young people don't have a cushion to handle any kind of unexpected expenses."

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More than 70 per cent of respondents said they'll be more careful with spending as interest rates rise, but nearly half — 48 per cent — said they will have to get further into debt this year to cover costs. That's up from 43 per cent in the last survey in September.

"The psychological effects of the Bank of Canada interest rate increases might not match up with Canadians' intended behaviors yet," Bazian said.

"While Canadians say they are heeding rate increase warnings, they are still reliant on credit to make their household budgets work. The result may be a dangerous debt trap that will be impossible for some to ever get out of."

Next rate hike likely to be on Wednesday

The Bank of Canada hikes interest rates twice last summer, bringing the key lending rate to one per cent from 0.5 per cent. The experts say the odds are better than even that Canada will see its borrowing costs rise again on Wednesday, when the Bank makes its next rate announcement.

Canada's economy last year grew at the fastest pace the country has seen since before the financial crisis of 2008-09.

Couple that with a blockbuster job market that just saw Canada's unemployment rate fall to its lowest level in modern history, and you have a recipe for rising inflation — exactly what the Bank of Canada means to avoid with an interest rate hike.

"Governor Poloz has consistently said that markets should look to the data for guidance on the direction for policy, and a jobless rate at the lowest level in at least 41 years, and generally upbeat sentiment, point strongly toward a January rate hike," Bank of Montreal rates and macro strategist Benjamin Reitzes wrote in a client note last week.

For the latest MNP survey, Ipsos polled 2,001 Canadian from Dec. 8 to Dec. 13, 2017. The poll has a margin of error of +/- 2.5 percentage points, 19 times out of 20.