Pattie Lovett-Reid: The impact of higher rates
If you are a homeowner, you have likely seen an increase in your net worth as property values in some of the hotter regions have soared. The dark side of this equation is if rates go higher, those who are so close to the margin could find their mortgage payments increasing – maybe not right away if they have locked into a fixed-term period.
As the economy improves and less stimulation is required, higher rates could be on the way – clearly a good thing for the economy yet a potentially challenging situation for those recent first time homeowners have only really experienced lower rates.
To be fair, most Canadians can handle their payments for now. But what we do know, according to the Bank of Canada, is the proportion of indebted households that owe at least 3.5 times their gross income has doubled since before the financial crisis. The cohort of the most heavily-indebted represents as many as 720,000 households and they are vulnerable with no safety net.
Credit lines and credit card balances have surged, and while delinquencies are being managed for now, when rates head higher, something has to give. With only so much income coming in a redistribution of money going out means higher payments, less eating out, less travel, less discretionary spending – and that too can have a knock-on effect on the economy. Even a modest increase in rates could result in a pull-back in spending, the very thing that has helped to sustain the economy.
So once again a warning. When was the last time you stressed-tested your household financial situation? Time to find out where you stand financially should rates go higher.
It is always good to make changes before you have to.