ending rates in canada are rising at a glacial pace, but the trend is significant enough that borrowers are being warned to be wary of their financial position, and to begin reducing their debt if at all possible.
We’re told that, on average, canadians owe $1.69 in credit market debt for every $1 of disposable income.
it’s a ratio that has some experts worried, especially as interest rates continue to climb.
last week, the bank of canada raised its benchmark rate to 1.75 per cent.
the increase was by only a quarter of a percentage point, and it was the fifth such increase since the summer of 2017.
there will be further increases in the rate, observers believe.
the era of cheap borrowing rates hasn’t exactly ended.
For at least a decade, canadians have enjoyed historically low interest rates and have responded by enlarging their debt, mostly because that debt was sustainable.
the point at which higher interest rates begin to represent a financial squeeze is something every borrower must find out for himself or herself, but the canadian debt-to-income ratio suggests such a squeeze might come sooner than later.
Older canadians who remember living through the late 1970s and early 1980s have seen this before, although interest rates then were catastrophically higher and helped induce a deep recession that threatened to destroy the economy and shatter the lives of those who owed money.
it’s not likely we’ll ever see interest rates of 15 or 18 per cent, or perhaps even 10 per cent, soon.
but those who lived through that era 35 and 40 years ago intuitively understand that debt can become a snarling monster if left unchecked and untamed.
the only good news out of the bank of canada’s most recent increase is that it’s a response to a robust economy and an unemployment rate that’s at a 40-year low.
the country is generally enjoying a level of prosperity.
to be sure, some of that prosperity has been borrowed against the hope of increasing incomes and rising home values.
but the bank of canada rate hikes are a reminder that interest rates are also prone to rise, especially when they have nowhere to go but up.
it would be better to tame the monster now, rather than later.