Rate hike may spell disaster for those in debt

Canadian household debt has never been so high, and residential interest rates are at historic lows.

So when rates rise even slightly — a process expected to start later this year in the U.S. and soon after in Canada — many cash-strapped Vancouverites will be forced to make hard financial choices, a local bankruptcy expert says.

Judy Scott of MNP Debt said mortgage foreclosures are expected to increase and overheated Metro Vancouver housing prices may fall when rates inevitably rise. “I’ve never seen debt levels this high and interest rates so low. It’s a bit of a tinder box,” she said. “So many people are already technically insolvent.”

Debtors holding floating rate mortgages or credit lines will see their monthly payments rise almost immediately. As most mortgages in Canada are set at fixed rates, Scott says that housing prices would be expected to fall when people have to renew their loans.

The most over-extended borrowers, and there are many who have been seduced by a long period of low rates, could be turned down for renewals and forced into foreclosures, Scott said. She said when the U.S. raises rates, a move due within months according to U.S. officials, Canadian officials will be forced to follow in order to support the loonie.

Scott advises that debtors should attempt to pay down loans right now, starting with credit cards and credit lines. Consumers should hold off on big purchases in favour of paying down big chunks of principal debt, if they can. Also, households should build “rainy day” savings to prepare for financial shocks that could accompany interest rate hikes.

In a recent semi-annual risk review, the Bank of Canada said the nation’s top financial risk is a housing correction connected to high household debt levels.