INCHING CLOSER TO THE EDGE
Higher interest rates have more indebted British Columbians on the brink – survey
British Columbians are increasingly fearful rising interest rates are pushing them toward insolvency, the latest data from an ongoing survey of Canadians’ indebtedness reveals.
The MNP Consumer Debt Index has tracked consumer attitudes about debt since last June—when interest rates started to move upward—and has found a steady escalation in anxiety among Canadians.
Here in B.C., 41 per cent polled in March indicated they are negatively affected by rising rates, up three points since December. More than half (51 per cent) fear rising rates could affect their ability to pay down debt, up two points from the last survey.
And most concerning, 30 per cent indicated rising rates could push them toward bankruptcy, a four-point jump since the end of 2017.
The rising anxiety surrounding debt and interest rate hikes comes as no surprise to Licensed Insolvency Trustee Lana Gilbertson with MNP LTD in Vancouver.
“It’s like something changed in January because we’ve been busier than we have been in several years.”
Certainly something did change. The Bank of Canada raised its overnight rate by 25 basis points to 1.25 per cent—the third time it had done so since last July.
Although interest rates are still low by historical standards, the rising rate environment’s impact is likely psychological.
“When you’re carrying a lot of debt and struggling to pay it off, any news about higher rates creates more worry in anybody whether they have debt products that will be affected by interest rate hikes or not,” she says.
Still, many British Columbians will see their costs rise if they have debt with a variable interest rate, which rises and falls in lockstep with the direction of the Bank of Canada rate. On a $600,000 variable mortgage, for example, each 25-point increase by the central bank means the mortgage’s interest rate rises by 25 points, costing an additional $80 a month of interest.
Given the survey found nearly half (47 per cent, up six points from December) of British Columbians indicated they were $200 or less away from financial insolvency after paying their bills and debt obligations each month, the additional mortgage interest cost is not insignificant, Gilbertson says.
“We’re not yet seeing a lot of homeowners seeking our services, but we’re starting to get more calls from them.” Additionally, she suspects the findings that 61 per cent of millennials were concerned rising rates may push them toward insolvency suggests new homeowners are struggling.
More broadly the number of consumers seeking help is on the uptick, Gilbertson adds.
“What I am seeing is unprecedented; people are really having a hard time making ends meet.”
Still, the MNP Consumer Debt Index numbers—while troubling— indicate individuals’ perceptions regarding debt and not necessarily that hundreds of thousands are on the edge of insolvency, says Craig Alexander, chief economist with the Conference Board of Canada.
“I’m a little surprised three in 10 respondents are signaling rising rates could push them to bankruptcy,” he says. “That’s very high relative to what Statistics Canada data suggest are the highrisk households.”
He adds the government agency measures these households based on debt servicing costs as a percentage of after-tax income.
“When more than 40 per cent of your after-tax income goes to debt, that’s where you can start thinking about whether a household may go bankrupt.”
But the Canada-wide figure is about eight to 10 per cent, he adds.
The number of stressed households, however, is likely higher in jurisdictions with high housing costs.
Yet Alexander says it’s unlikely three in 10 households are nearing bankruptcy even in Vancouver.
“This is more a measure of anxiety than a precise metric of the risk of default.”
Even so the findings signal indebted consumers should probably act now.
Among the warning signs you may need help are only making minimum payments, spending more than you earn and an inability to save for retirement or emergencies, says Isaiah Chan, program manager with Credit Counselling Society in Vancouver.
“Budgeting, tracking expenses and paying off the highest interest debt first” are all tried and true steps that counselling agencies can help indebted individuals implement to reduce indebtedness.
“But people also need to look at the factors that caused the debt.” Chan says.
Although it may be difficult to eliminate these factors entirely —like high housing costs— acknowledging their impact and taking steps to address reduce it are critical to long-term financial well-being.
A good first step is a simple phone call, Gilbertson says, adding Licensed Insolvency Trustees do not just administer bankruptcy proceedings.
“We help people who are looking for advice around how to get a budget plan in place, and those looking for general help managing their debt,” she says.
“We can talk to people about all kinds of options for dealing with indebtedness whether that’s looking at the sale of assets, debt consolidation, consumer proposals, bankruptcy or simple things like cutting expenses.”
While some individuals do file for bankruptcy, it’s usually a last resort when they have no way to pay their debts.
“That might occur when they’re unemployed, on fixed government income, or face some significant financial crisis.”
Increasingly common are consumer proposals, in which individuals enter into an agreement to pay back a portion or all of their debt within five years without interest charges.
“Most consumers with gainful employment or assets are doing a consumer proposal,” she says.
“Statistically, consumer proposals have been increasing over the last 10 years, whereas bankruptcy rates have been declining.”
Gilbertson says this reflects a strong economy. Most consumers are working full-time and have income to service debt, only they may require better terms. “That could change if we have a recession where people lose their jobs, and bankruptcies rise like following the 2008/2009 market crash.”
She adds even with no recession bankruptcy filings have been creeping up since the start of the year, which could indicate Vancouverites are struggling with soaring housing costs and debt-loads and indeed nearing a breaking point.
“What’s happening now might just be the tip of the iceberg.”
Want a free checkup on your debt health? Visit MNPdebt.ca/DebtScale and give MNP’s Debt Scale a try. The 14-question survey can provide you with steps to achieve or continue living a debtfree future.