Due to historically low interest rates, Canadian consumers have taken on obscene amounts of debt since the economic collapse. Today, Canadians owe a total of nearly $2 trillion in debt (mortgage and non-mortgage). Household debt has been a cause of concern for the Bank of Canada (BOC), but the average Canadian doesn’t seem to care. The average Canadian consumer may start to care if interest rates move upwards, even by a minuscule number.
According to a new report from credit-monitoring firm TransUnion, a large number of Canadians would be financial trouble if interest rates were to go up by between 0.25 and one percent from its current overnight rate of 0.5 percent.
The research found that nearly one million Canadians would not be able to handle a one percentage point increase in interest rates. Also, more than 700,000 Canadians, which have a line of credit, variable-rate mortgage or credit products, would be in financial trouble if rates went up just 25 basis points.
One in six Canadians would experience a “financial shock” of at least $50.
“For some, a $50 increase in their obligations may simply be managed by forsaking a couple of restaurant dinners and eating at home, while for some others, this may mean they would not be able to fill their gas tanks to get to work,” said Jason Wang, TransUnion’s director of research and industry analysis in Canada, in a statement.
“Despite rising debt loads for Canadians, our study found that the far majority of consumers will be able to manage an interest rate hike of up to one percent. Our assessment, though, identified a subset of the population of nearly one million borrowers who may face financial challenges when rates rise.”
Most financial experts do not expect the Canadian central bank to raise rates anytime soon. With the national economy being as sluggish as it is, the BOC will likely keep interest rates where they are for the time being.
But the potential scenario should serve as a warning. As many Toronto and Vancouver take on monster mortgages and Canadians elsewhere rely on credit to maintain their daily lifestyles, a rate hike of any kind could pose substantial harm to households across the Great White North.
This can also be found in the United States, too. Many Americans are also facing enormous levels of debt, and any rate hike could affect them greatly.
Here is a statistic: the average Canadian owes $21,348.
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