The Bank of Canada’s decision to hike its key interest rate from 0.75 per cent to 1.00 per cent last week announces difficult days ahead for households that lack a savings buffer, according to Richard Payette, President and CEO, Manulife Quebec.
Mortgage borrowers who have no financial margin of maneuver to handle unexpected costs and who have not developed savings discipline are most at risk when short-term rates go up, Payette, said in an interview with FlashFinance.ca, a sister publication of The Insurance & Investment Journal.
Hard for many Canadians to handle
He said a 10 per cent increase in mortgage payments would be hard for many Canadians to handle. This level of increase could be reached if the Bank of Canada’s policy interest rate were to move from 0.50 per cent (as it stood at July 15, 2015) to 1.50 per cent. The latest rate hike has brought households closer to this scenario. "With the two successive increases of 0.25 per cent on July 12 and September 6 of this year, we are halfway there," said Payette.
The difference between a rate of 0.50 per cent and a rate of 1.50 per cent for a $ 200,000 mortgage, amortized over 25 years, is approximately $100 more per month. The current rate of 1.00 per cent represents an approximate increase in monthly mortgage payments of $50, in this example.
Would struggle to cope with 10 per cent rise
"Thirty-eight per cent of Canadians who took out a mortgage loan revealed to us last May (in a survey) that they would have trouble managing a 1 per cent to 5 per cent increase in their mortgage payments," said Payette, adding that this is now the situation today. He highlighted that 70 per cent of Canadians said they would struggle to cope with a 10 per cent increase in their mortgage payments.
The survey conducted by Manulife Bank found that Canadians are ill-prepared for financial shocks. "Fifty per cent of respondents said they had less than $5,000 in savings to cope with the unexpected," said Payette.
Consult your adviser
Payette says those most impacted by the new key rate should consult their adviser and make adjustments to adapt to the higher interest rate environment. "There is still time before the effects are felt. People can review their personal finances and lifestyle. People must also acquire more savings discipline. Our advisers recommend to their customers to give themselves a margin of maneuver: they usually suggest saving the equivalent of three to six months of income, for the unexpected."