The Current

Expert advice on how to stop 'using our houses like ATM machines'

As part of the CBC News series, Debt Nation, chartered accountant Doug Hoyes explains how Canadians carrying debt need to understand how higher interest rates will affect their payments.

Canadians in debt must stop consuming beyond their means, Doug Hoyes warns

By the end of last year, Canadian households owed just over $2 trillion, with mortgages accounting for almost three-quarters of this debt. (Jonathan Hayward/The Canadian Press)

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The Bank of Canada has raised its benchmark interest rate a quarter point on Wednesday — the fifth rate increase since July 2017 — to 1.75 per cent.

The latest rate hike is bound to affect Canadians with mortgages, car payments and other debt. By the end of last year, Canadian households owed just over $2 trillion, with mortgages accounting for almost three-quarters of this debt.

For Helen Van Dongen of Mississauga, Ont., not knowing if she could make her next mortgage payment became too daunting. After losing a corporate job five years ago, she had to resort to emptying out her RRSPs and maxing out credit cards to pay her bills. 

I now joke with my friends that I'm going to have to retire about three weeks before I die.-  Helen Van Dongen 
Helen Van Dongen's debt problems began when she was restructured out of a corporate job, but after a trying few years she has once again landed on her feet — debt free. (CBC)

After many sleepless nights, the event planner decided this spring to dig herself out of her crippling $140,000 debt by selling her condo.

"I have a small cushion — only $25,000 — that remained after I had paid everything off, and my RSPs are gone," she told The Current's guest host David Common.

But while Van Dongen solved one issue, the 58-year-old has no other assets to rely on as she gets older.

"I now joke with my friends that I'm going to have to retire about three weeks before I die because I don't think there's going to be enough money there to have the kind of retirement that I might have wanted," she said.

Van Dongen doesn't love giving up being a homeowner but felt she had no choice.

"I had to do it in order that I was the one in control," she said.

'Using our houses as ATM machines'

According to chartered accountant Doug Hoyes, it's common for people to switch jobs frequently during their careers and for those in their 50's to have precarious employment. He warns against the perception that working for big corporations, like Van Dongen had for 30 years, is security — it's not.

"The big firms are the ones who do the the mass layoffs … and so as a result you can find yourself later in life without the security that you thought you had," Hoyes told Common.

He said these companies often get rid of employees who are in the upper pay scale.

Doug Hoyes is a licensed insolvency trustee with Hoyes, Michalos & Associates Inc. and the author of Straight Talk on Your Money. (Submitted by Doug Hoyes)

It makes sense to Hoyes that Van Dongen decided to sell her condo given she bought it awhile ago and the value had gone up. But for someone who bought a house last year at the peak of the real estate market, with interest rates creeping up, the outcome won't be as profitable, he said.

"We've been using our houses as ATM machines. 'OK, I need some money, I can refinance, get a secured line of credit,'" Hoyes said.

"As a result, we've been able to continue to consume beyond our means. That is not going to continue forever if house prices get under any kind of pressure. So we can't continue to live like that forever," he said.

As a consumer, you have to understand how the financial system works in order to avoid drowning in debt, said Hoyes. 

So with the central bank's latest rate hike, Hoyes explained what that means in "real terms."

"If you've got a mortgage, or a variable rate line of credit, go do the math to figure out what that means in dollar terms for you," he said.

If you're concerned about how rising interest rates will affect your monthly budget, a new CBC survey shows you're not alone. (CBC)

Take for example, a $400,000 mortgage, with a 20-year amortization at a quarter point increase, Hoyes estimates additional payments of about $50 a month.

With four interest rate hikes already "that's $200" a month, said Hoyes, ahead of Wednesday's Bank of Canada rate decision.

"It's going to happen again today, now we're up to $250 bucks.

"Well, how many people in the last year have had an increase in their paycheck by more than $250 — probably not everybody. That's the impact of higher interest rates."

Click 'listen' near the top of this page to hear the full conversation.

With files from CBC News. Produced by Alison Masemann, Caro Rolando, Julie Crysler and Donya Ziaee.