Canadians worry about rising rates but few prepared: poll
Youth seen in ‘precarious situation’ over lack of savings, writes Jonathan Chevreau.
More than half of Canadians think rising interest rates will negatively impact their personal finances, but only about a quarter of them have an emergency fund to deal with any potential hardship, according to a new poll.
The survey of 1,350 voting-age adults by Forum Research Inc. was conducted after the Bank of Canada hiked its benchmark overnight rate from 0.75 to one per cent on Sept. 6, the second increase in three months.
After an unprecedented nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. “Rates were so low for so long, it was almost like money was free,” said Forum president Lorne Bozinoff in an interview. “Some may have overextended themselves during that time, thinking rates will never go up.”
Respondents said they were also concerned more rate hikes are on their way, Bozinoff said. Some 12 per cent of those surveyed said they expect the negative impact of higher rates to be extreme, a six-per-cent increase from a similar poll conducted in August.
That said, 17 per cent believe rate hikes will have some positive aspects: You’d expect debt-free seniors to welcome higher returns on GICs and fixedincome investments. Another 38 per cent don’t think it will have an effect either way.
Bozinoff is more concerned that 26 per cent of respondents have no emergency savings, and 40 per cent have a cushion of a month or less.
Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14 per cent have two to three months, nine per cent four to five months, and 13 per cent six months to a year. Only 15 per cent have a year or more and predictably, 56 per cent of the latter group are age 55 or older. Unfortunately, the young are in a “really precarious situation,” Bozinoff said. More than a third (35 per cent) of millennials aged 18 to 34 have no savings at all, while another 10 per cent have less than a month.
Laurie Campbell, CEO and executive director of Credit Canada, predicts “we’ll see more fallout” if rates rise another percentage point. “We’re seeing people one or two paycheques from financial disaster, with no cushion for job loss, rate hikes or to repair the roof.”
Canadians now owe $1.67 for every $1 they earn, compared to 90 cents for every $1 earned back in 1990. Given the high cost of housing in major cities, it’s not surprising that 60 per cent of young people are at least “somewhat concerned” by the prospect of rising rates, as are those of any age with minimal wealth (57 per cent). Older people and/or the wealthy are less concerned: 28 per cent of those 55 to 64 and 31 per cent of the 65-plus group aren’t too worried; neither are the wealthy (33 per cent). But that’s what you’d expect: wellheeled elders have little or no mortgage debt and likely bought their homes when they were much more affordable.
The poll didn’t break results down by cities like Vancouver and Toronto but “British Columbia is showing more concern than the national average and so is Alberta,” Bozinoff said.
Campbell isn’t surprised high-priced housing markets like Toronto’s have already been impacted by rising rates: “People are tapped out. Many bought more than they can afford and are house poor. Then they move to other types of credit to make up the difference. That’s scary.”
Rising rates won’t affect creditcard rates because they’re already high, Campbell said. But they pose a risk to anyone with nonfixed debt, like variable mortgages or lines of credit. Those “are being tapped into at an alarming rate,” as are home equity loans.
BMO Financial Group chief economist Doug Porter says the Forum findings speak “directly to the widespread concern around the buildup of household debt: the results suggest those concerns are well-founded.”
Because Canadians are carrying record levels of debt, they “can’t even think about starting to save money,” says Doug Hoyes, a bankruptcy trustee with Kitchener, Ont.-based Hoyes, Michalos & Associates Inc. and author of the just-published Straight Talk on Your Money.
BMO’s Porter expects the Bank of Canada will be very cautious about another rate hike. After the September move, it said it would monitor the economy closely to see how sensitive borrowers are to higher rates.
The Forum poll “suggests they are very sensitive indeed,” Porter said in an email. “This doesn’t mean the Bank will stop raising rates; just that they will be extremely deliberate and cautious in doing so.”
Any future rate increases would be relatively moderate, Porter said. “When we return to ‘normal,’ normal will be a lot lower than in the past.”