The Bank of Canada is scheduled to make its second 2022 interest rate announcement next week on March 2nd. After holding off on moving rates up on January 26th, many anticipate that the BoC will nudge rates upward this time around.
Some Canadians are feeling concerned about higher interest rates and how it will affect their mortgage payments and other finances.
A new report by insolvency firm MNP LTD. shows that more than half of Canadians are worried about a rate hike, with 55 per cent saying that they are concerned about the impact of rising interest rates on their financial situation. This is a three-point increase from September according to the poll, which was conducted by Ipsos for MNP LTD. in December with 2,000 adult Canadians.
“As we approach what is likely to be the first of several interest rate increases in the coming year, more Canadians are concerned about how they would cope,” said Grant Bazian, president of MNP LTD., in a press release.
Of the respondents, 54 per cent said that they are more concerned about their ability to repay their debts than they used to be. Forty-seven per cent worried that they will be in financial trouble if interest rates go up further, and 35 per cent of those surveyed agreed that rising interest rates could move them toward bankruptcy.
“The most vulnerable are those who have taken on credit to get by and aren’t able to pay down the debt,” added Bazian. “The added debt servicing costs are coming at a time when many Canadians are already finding it less affordable to feed their families or pay for things like housing.”
Variable-rate mortgage holders could be “most significantly impacted”
Most of the participants who planned to renew their mortgage soon expressed worry about rising rates — 61 per cent of respondents who will renew their mortgage in the next year said that they worry that they will be in financial trouble if interest rates go up much more. According to the poll, five per cent of Canadians have said that they will renew their mortgage in the next year.
“Variable-rate mortgage holders will be the most significantly impacted, especially with talk of there being a string of rate increases in 2022,” said Bazian. “Households may need to re-adjust their budgets to accommodate for hundreds or thousands of dollars more a year in mortgage-related costs.”
In an email statement, James Laird, co-founder of Ratehub.ca and president of CanWise Financial mortgage brokerage, said that it’s a “toss-up,” whether the BoC will raise the key overnight rate by a quarter of a point or a half of a point.
“The biggest surprise would be if they don’t change the rate at all next week, given today’s historically high inflation and the language in their previous announcement,” said Laird in a statement. “The Bank told us the need for monetary stimulus is over. Even though the virus still exists, the economy is back to pre-pandemic levels.”
An increase of 25 or 50 basis points will likely not be enough to cool off the hot spring market or slow down prices, said Laird. Immigration will bring about increased buyer demand to a housing market that is experiencing supply shortages.
Although borrowers with a fixed-rate mortgage will not be affected by rising rates until their next renewal date, Laird pointed out that variable-rate mortgage holders will feel the effect immediately.
“While no one will be surprised if the Bank raises the target for the overnight rate, Canadians who hold a variable-rate mortgage or a balance on a home equity line of credit (HELOC) will feel the rate increase right away,” said Laird. “Their interest rate and mortgage payment will go up, and they should budget for further rate increases over the remainder of the year.”
According to Ratehub’s mortgage payment calculator, a homeowner who placed a 10 per down payment on a $700,000 home with a five-year variable rate of 0.9 per cent amortized over 25 years would have a monthly mortgage payment of $2,418.
Should the BoC make a 25-basis point rate increase next week, the variable rate would increase to 1.15 per cent, equal to a new monthly payment of $2,491, about $73 more per month. If rates increase by 50 basis points, their variable mortgage rate will increase to 1.4 per cent and their monthly payment will rise to $2,566, $148 extra per month.
Rising interest rates could affect younger people the most
Younger Canadians were more likely to feel the effects of interest rate increases compared to those who were older.
Forty-nine per cent of those aged 18 to 34 were the most likely to agree that rising interest rates could move them towards bankruptcy, slightly higher than those aged 35 to 54 (41 per cent). Canadians under 55 years old were also more likely to say that they are already beginning to feel the effects of interest rate increases.
With a handful of rate hikes likely coming this year, 25 per cent of respondents said that they do not have a solid understanding of how interest rates impact their financial situation. Twenty per cent of those surveyed stated they are concerned about their ability to absorb an interest increase of one percentage, while two-thirds of respondents who describe their financial situation as “poor,” say they are not prepared, up 12 points from September.
“It’s promising to see some Canadians are taking note of the chatter surrounding impending interest rate increases, and are adjusting their mindset accordingly,” said Bazian. “But a lack of financial literacy impacts our findings as well because we know many Canadians don’t understand how interest rate increases will affect their personal financial situation.”
