Rising rates have more consumers seeking help with debt
Study: 48% said they are $200 or less from not being able to meet their monthly obligations
Many Canadians may be fretting over rising interest rates, but Delores Wilms isn’t one of them.
It’s not that the 55-year-old educational assistant hasn’t endured her share of financial challenges. In fact, she and her husband Bob, a bus driver, have been living lean for more than five years after running into debt trouble.
Before he started driving a bus, her husband had been working in the trades. Work became scarce and so did cash.
“I had the summers off working in education, so there was a time when there was nothing coming in and we had to rely on credit cards,” says Wilms, a mother of three adult daughters.
The debt piled up to the point that it was unmanageable.
Yet today, the worst is behind them. And the couple is living debt-free. Rather than worrying about the impact of three interest rate hikes by the Bank of Canada in the last nine months, the Wilms can look forward to higher rates on GICs as they save for retirement.
Yet the Richmond couple is likely in the minority, based on the latest data from the MNP Consumer Debt Index.
Ipsos conducted the ongoing poll for MNP Ltd., one of the largest personal-insolvency practices in the nation, and found Canadians are increasingly anxious about their ability to manage their debt.
Since rates started rising since July, Canadian households have seen their budgets tighten, the January survey revealed. Onethird, for example, indicated they cannot cover their monthly bills and debt repayments. That’s an increase of eight per cent since the last survey in September.
Moreover, 48 per cent said they are $200 or less from not being able to meet their monthly financial obligations.
Licensed insolvency trustee Lana Gilbertson says the results reflect what she sees among clients seeking help managing debt.
“In January, we had one of our busiest months in the last couple of years,” she says. And she expects to see even more consumers in the coming weeks because it usually takes a few months for higher rates to affect debt-ridden consumers negatively in a meaningful way.
In particular, Gilbertson says rate hikes will have the worst impacts on households in Vancouver and other Canadian municipalities with high real estate values because they often have variable rate mortgages and carry home-equity lines of credit, both of which immediately rise when the central bank hikes rates to tame inflation.
In effect, it’s a double-whammy for consumers. Rates rise because prices for goods and services are rising. And consumers, dipping into the equity in their homes — via lines of credit — to deal with higher costs, suddenly are faced with higher interest costs as well, Gilbertson says.
“For those making ends meet, they are reporting having fewer dollars at the end of the month,” she says, pointing to the recent MNP survey.
“In B.C, people indicated on average having $802 left every month after paying bills and debt obligations, which represents a 17-per-cent cut since June when they had $960.”
Non-profit financial counselling agencies are also seeing more consumers in need of help. But the kind of client they’re seeing is also changing — a reflection of higher rates.
“We’re actually hearing from people who are having more of a struggle because they have got interest-bearing debt affected by interest rate hikes,” says Gary Tymoschuk, vice-president of operations at the Credit Counselling Society in Vancouver.
Previously, the typical client would have maxed out the balances on multiple credit cards, struggling to make the minimum payments, which is a sure sign of trouble, he says.
More recently, the agency has seen an influx of consumers with high levels of debt on floating rate lines of credit.
“One hike of 25 basis points doesn’t seem like a lot, but many people have large balances on their lines of credit and have been making interest-only payments,” Tymoschuk says. “Well, if the interest keeps going up, the monthly payment goes up too, and it starts to impact people’s ability to manage their household expenses, including debt repayment.”
Gilbertson says with the possibility of another 25-basis point increase in the next 12 months, indebted Canadians must get a handle on spending now, so they can find more cash to pay for higher debt costs to come.
“The first place to look is household spending and to get control of it if you don’t already follow a budget to plan for future expenses.”
This advice isn’t lost on the Wilms. She and her husband began tracking expenses to increase free cash to pay down debt after entering a repayment plan that all but eliminated the interest charges on what they owed.
“We were like $30,000 in debt, and we paid it off in about three and a half years,” Wilms says, adding they have lived without credit for the last five years.
Changing their behaviour was indeed challenging, Wilms says, but it was much less stressful than wondering how they were going to make it until the next payday.
“It’s tough, but you do eventually learn to live the right way.”
“Eventually I want to be able to get a mortgage to buy a home for my family.”
In B.C, people indicated on average having $802 left every month after paying bills and debt obligations, which represents a 17-per-cent cut since June when they had $960.