TORONTO — After racking up debt through years of ultralow interest rates, Canadians are being urged to modify their spending as they face the prospect of rising borrowing costs coupled with soaring inflation.
"Recalibrate your spending completely, recalibrate how you're living your life," advises Laurie Campbell, director, client financial wellness at debt relief specialist Bromwich and Smith.
Like going on a diet, she says managing money while under stress requires lifestyle changes to avoid going back to old habits.
Campbell suggests people closely examine their whole financial situation and make a serious effort to reduce debt as much as possible even though the lifting of lockdowns will likely spur a desire to go out and spend.
"Can't blame them, but as they do that we're going to see the debt-to-income ratio go up. And with interest rates climbing and inflation climbing, it's kind of a bit of a perfect storm," she said in an interview.
Canada's central bank is expected to raise its trendsetting rate by 0.25 of a percentage point on March 2 and increase rates several more times over the next year or two. In a speech Wednesday, Bank of Canada governor Tiff Macklem made it clear that higher inflation means rising interest rates.
“Inflation is too high and we will be bringing it down,” he said.
Interest rates for variable rate mortgages, credit cards and lines of credit closely follow the central bank's key rate.
Higher interest rates won't immediately affect homeowners with fixed-rate mortgages, until they are ready to renew. Those looking for some peace of mind could lock in their mortgages before rates increase.
Campbell expects insolvencies, which are fairly low right now, will increase over the next year as more people are unable to make minimum payments with the price of groceries and fuel increasing.
"It's going to be a bit of a bubble burst for some people."
She worries some people may make desperate decisions that could worsen their situation, such as turning to debt consultants who charge for their services when a credit repair clinic can help for free, or linking up with a high interest lender to consolidate debt.
For millennials, who came of age in the years before the financial crisis of 2008-09 and are now raising families of their own, rock-bottom interest rates have been the reality for most of their adult lives.
Experts say it's important to understand the structure of debt because higher lending rates mean less of their payment will go to principal and more to interest. Your monthly mortgage payment may not look that different, but a smaller chunk of it will be paying down the principal than before.
"Understanding that holistic household financial picture is sort of job one and then look at some scenarios on what's going to happen to your monthly expenses should you see a change in interest rates," said Michael Greenberg, portfolio manager at Franklin Templeton Investment Solutions.
Looking at those scenarios could force some hard decisions as far as spending and savings, he said.
A recent Angus Reid Institute survey found that 34 per cent of Canadians believe higher interest rates would have a minor negative affect on them, one-quarter believe the impact would be majorly negative, 22 per cent say it would have no effect and six per cent say it would be positive.
More than half of those who self-identify as "struggling" believe a rate jump would be very bad news for their household and a further quarter anticipate it would have a minor negative impact.
The survey also found that lower income respondents were most likely to believe an increase in rates would not be in their best interest.
Savers and seniors on fixed incomes would benefit from higher rates and some Canadians are in good positions heading into the rate hike cycle if they kept working during the pandemic and paid down debt from their accumulated savings.
"It does seem like they're two camps to how people have weathered the pandemic from an economic perspective," said Kristi Ashcroft, senior vice-president and head of product at Mackenzie Investment.
Rising wage growth, strong employment markets and an eventual receding of inflation means it shouldn't be too big a concern for the economy or the population as a whole, said Greenberg.
"But those average numbers do hide some pain points specific within the market and within the economy," he said.
While rate hikes could cause a shock, the situation won't resemble the late 1970s to mid 1980s when interest rates climbed above 12 per cent, he said.
An advantage this time around is that many homeowners have built up a lot of equity through the capital gains in their residences that they can tap into, said Beata Caranci, chief economist at TD Bank Group.
Those facing renewals could see if they can extend the amortization period to provide some payment relief.
Stress tests required by the financial services regulator will also help cushion the blow because mortgage borrowers have had to qualify at much higher interest rates, Beata said.
"These people don't necessarily need to do anything about higher rates because they've already had their income checked against a higher interest rate."
This report by The Canadian Press was first published Feb. 10, 2022.
Ross Marowits, The Canadian Press
