Prior to the financial crisis of 2007 Canadians never knew that central bank interest rates could ever be zero, or negative as in the case of Europe. GIC rates were typically above 4 per cent and being offered a mortgage of 6 per cent was considered a good deal. Things changed drastically after the crisis and those days seem like a distant memory, especially for the younger generation.
Getting 2 per cent on a GIC has been painful for those living on a fixed income, but the sub 3 per cent mortgage rates that followed was a blessing for those in debt. Unfortunately, it has also led to a rapid increase in household debt and some of this has been associated with households acquiring secondary properties and increasing their lines of credit alongside the appreciation in their home values. Currently, Canadians have the highest ratio of household debt to disposable income on record and the risk is that the days of ultra low borrowing costs disappear.
This has already begun as the Bank of Canada has lifted its official overnight rate back above 1 per cent and bond yields have pushed up to the highest level since 2011. Term mortgage rates have also started to creep up and if you have an adjustable mortgage or line of credit then you will have seen this reflected in the wake of higher prime rates. For those who have budgeted for an escalation in higher borrowing costs, this new environment may not be a challenge. For all others there is going to be a shock. In the very least, higher interest rates could cause households to curtail spending on other areas. At worst, it could force liquidation of assets, including secondary properties.
The solution to the dilemma facing Canadians is not simple, but it starts with a recognition of whether over-leverage exists, an examination of the household balance sheet to see if it is stress tested against even higher rates, reduction in debt and potentially a change in lifestyle. The sooner this is done, the better.
By Andrew Pyle, MA, CFP, CIM, FMA, FCSI Branch Manager, Senior Wealth Advisor and Portfolio Manager, Scotia McLeod
The Pyle Group, www.pylegroup.ca