Almost a million Canadians wouldn't be able to handle even a one percentage point increase in the interest rate they pay on their debts, new research says.
According to a report from credit-monitoring firm TransUnion, 26 million Canadians have some form of debt, including mortgages, lines of credit, and credit-card debt. The average debtor, the company says, has 3.7 different credit products.
Company research released Tuesday says that roughly 718,000 of those people wouldn't be able to keep their financial heads above water if their interest rate went up by as little as 0.25 percentage points.
And another 253,000 on top of that would go under if the rate they must pay on their debt increased by a slightly larger amount — a full percentage point.
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Considering that interest rates are currently at record lows, that's a precarious position to be in.
"Hundreds of thousands of borrowers traditionally believed to be low-risk consumers may suddenly become risky," said Jason Wang, TransUnion's director of research and industry analysis in Canada.
Variable rate borrowers
TransUnion estimates that roughly seven million Canadians have a variable rate on their debt, a little over a quarter of all accounts. That's a group that's especially vulnerable to a rate hike, as the impact of any rate move is immediate.
"It is unfortunate almost a million Canadians would struggle if mortgage interest rates increased even a small amount," said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada. "I know cutting back on expenses may be tough from the outset however every little bit helps. It can be a difference between managing or struggling with your debt load."
The Bank of Canada twice cut its benchmark interest rate in 2015 to stimulate the economy, and while the consensus economist view is that the bank has no plans to raise rates any time soon, that won't be the case forever.
Most borrowers could withstand a rate increase of 0.25 points, because it would just mean paying an added $10 or less every month toward their debt — not a severe sum. But for almost one out of every six borrowers, it would mean an extra $50 or more every month.
"For some, a $50 increase in their obligations may simply be managed by forsaking a couple of restaurant dinners and eating at home," Wang said, "while for some others, this may mean they would not be able to fill their gas tanks to get to work.
And bigger rate hikes would obviously bite even deeper. A full percentage point increase in the rate, TransUnion calculates, would add up to more than an extra $50 a month for 40 per cent of borrowers.
All in all, the company's numbers paint a picture of an overall healthy situation for Canadian borrowers, where the vast majority are staying on top of their debts and could withstand modest increases in the rates they pay on them.
But while they are in the minority, there's still a large group of people who are in the red zone with regards to their debt levels.
"A house on fire is never an emergency," the report says, "unless it is your house."