One million Canadians at risk of payment shock if interest rates rise

Nearly one million of the 26 million credit-active Canadians could be in for a “payment shock” if the Bank of Canada ups its interest rates, according to a new report by credit information giant TransUnion Canada.

A 0.25 percentage point increase to the Bank of Canada’s Target Overnight Interest Rate, which currently stands at 0.5 per cent, would cost nearly one in six borrowers an extra $50 a month, while a a one percentage point increase would tack on a $50 or more charge for 40 per cent of Canadians with a variable rate mortgage or line of credit with $50 more a month.

While the central bank has given no inclination towards boosting rates anytime soon, the record lows the Bank of Canada has maintained – down from a high of 4.5 per cent in 2007 – are meant to stimulate the economy and are apt to rise in tandem with recovery.

For the seven million Canadians with a line of credit or variable-rate mortgage, preparing for those increases means focusing on the larger debts like your mortgages and paying them down while the interest is still low, says Wade Stayzer, vice president of sales and service at Meridian Credit Union.

“We’ve all heard it ad nauseam… pay down your highest debt first,” says Stayzer. “But when we talk about rate increases, the biggest impact there is going to be on your mortgage.”

He points out that interest on credit card debt typically stands around 21 per cent so “it’s not likely to move that much.”

“But it’s really about if the environment changes, am I able to continue to afford to live the way I am?” he says.

A good way to find out is to “stress test” your mortgage.

“Add two per cent to your interest rate, find out what that payment would be and then take a look – how does that impact your financial position and what can you and can’t you do,” he explains. While the ideal time to stress test a mortgage is before buying, it’s important to do regular pulse checks as the economic climate evolves.

“That’s a process that’s best practice,” says Stayzer. “Everyone should be stress-testing their mortgage because interest rates are at an all-time low now and have been that way for some time… I think we tend to get lulled into submission.”

Another piece of advice, especially for those whose mortgage is up for renewal soon, is not to reduce your payments.

“If you’ve established that you can live paying $500 bi-weekly then regardless of what your mortgage comes back at for renewal, because likely the interest rate is going to be lower, we would encourage folks to maintain that payment,” says Stayzer. Ultimately, this strategy can help you pay down your mortgage faster.

As for the dreaded credit card debt, he doesn’t see it rising all that much because it’s already a significantly higher rate. But for those who are carrying high levels of credit card debt and are concerned about the increase he recommends consolidation.

“Work with a financial institution to get that at a lower interest rate,” he says. “Because a consolidation loan is, although possibly higher from an unsecured perspective, from a rate perspective is not going to be anywhere near what a credit card is going to pay and charge.”