As the Bank of Canada prepares to announce its latest decision on interest rates, a new survey suggests a growing number of Canadians think they would be in financial trouble if rates rise again.
A survey released Monday by Canada's biggest insolvency firm, MNP Ltd., indicates one in three respondents is already feeling the impact of higher rates.
In July and again in September, the central bank hiked its benchmark interest rate by 25 basis points each time, bringing it to one per cent. The bank is scheduled to release its next decision on interest rates on Wednesday, and the market is currently forecasting about a one in six chance of a hike.
While still low by historical standards, the rate that consumer banks use to determine what consumers will pay in interest for loans, mortgages and the like has now effectively doubled this year — and Canadians are already feeling the pinch.
Almost half, 46 per cent, of respondents said they are more concerned about their ability to repay their debt as rates rise.
"It's clear that people are nowhere near prepared for a higher rate environment," MNP president Grant Bazian said. "The good news is that there seems to be at least the acknowledgement now that rates are going to climb, which might make people reassess their spending habits — especially using credit."
The numbers come from the MNP Consumer Debt Index, which was compiled by polling company Ipsos from Sept. 18 to 21. In the survey, a sample of 2,005 Canadians aged 18 and up from an Ipsos online panel was interviewed online.
Quotas and weighting were employed to ensure that the sample's composition reflects the overall population according to census information. While the survey is not randomized, a random poll of this size would yield results within a margin of error of plus or minus 2.5 percentage points, 19 times out of 20.
In the survey, 42 per cent of respondents said they are just $200 or less away from not being able to pay their bills and debts each month.
Among different generations, millennials — broadly defined as those born from 1981 to the mid-1990s — are the ones most likely to say they are feeling the effects of higher rates, with 40 per cent responding they can already feel the pinch.
They are also most concerned with their ability to repay their debts as interest rates rise, at 52 per cent, and 38 per cent of millennials said higher interest rates could move them towards bankruptcy. Only 30 per cent of generation Xers (born between the mid-1960s up to about 1980) and 18 per cent of baby boomers (born between World War II and the 1960s) also responded that way.
There were also differences across the country.
Fifty-five per cent of Albertans say that if interest rates rise, they would be more concerned about their ability to repay their debts — ahead of those in B.C. and Quebec (47 per cent), Saskatchewan. Manitoba and Atlantic Canada (45 per cent), and Ontario (44 per cent.)
Concern about rising interest rates triggering a move toward bankruptcy is significantly more pronounced in Alberta (37 per cent), followed by Quebec (34 per cent), Atlantic Canada (32 per cent), Saskatchewan, Manitoba and Ontario (23 per cent), and B.C. (22 per cent.)
"To get a clear idea of whether or not you can afford your debt as rates move up, you have to stress test your budget at different interest rates and determine how and if you can handle higher borrowing costs," Bazian said.
Many Canadians, he added, "already don't have enough money to cover their basic living costs. They've been using credit to make ends meet. In a higher rate environment, their lifestyle becomes unaffordable."
Canadian debt loads have been creeping higher for several years, but Canadians are managing to stay on top of them, as insolvencies and delinquencies are still low by historic standards, at between zero and five per cent, depending on the type of debt.
Jamie Feehely, managing director of Canadian structured finance for ratings agency DBRS, says he doesn't anticipate interest rates to rise until next year. But that belief is based on a number of assumptions that could be undone by future events, such as the outcome of negotiations of the North American Free Trade Agreement, he added.
"It's really just far too difficult to tell where rates are going to go in 2018 given the geopolitical risks and just the external factors affecting Canada," Feehely said.