BoC interest rate hikes severely impact heavy borrowers

By Al Beeber - Lethbridge Herald on January 26, 2023.

LETHBRIDGE HERALDabeeber@lethbridgeherald.com

Another interest rate hike by the Bank of Canada could mean more trouble for Canadians struggling under a growing debt load.

The Bank of Canada on Wednesday raised its key interest rate to 4.5 per cent – a quarter of a percentage point – and one analyst says that could be more bad news for Canadians.

Sarah Stachiw, a communications specialist with licensed insolvency trustee Bromwich + Smith in Lethbridge, said her firm thinks the hike will have an impact.

The rate is now the highest it’s been since 2007.

“We think it’s going to affect consumers largely. We know that Canadians are already struggling with debt. This is only going to make debt harder. It’s going to be harder to borrow money so any lines of credit, any mortgages, any credit card debt they already have is now going to increase.

“So your debt load is already increasing, your income’s not going to increase so you’re already going to be carrying more debt based on this increase,” said Stachiw.

The average Canadian already carries about $1.79 in debt for every dollar they earn, Stachiw said.

So with interest rates increasing by the amount they have, depending on the size of a mortgage, a person could be paying a couple of hundred dollars more a month now, said Stachiw.

The rate increase will affect grocery and restaurant prices, as well.

In terms of debt, Alberta is leading the country, she said. The province had one of the highest insolvency filings in November with only Ontario as high as Alberta, Stachiw said.

“When you look at it population wise, we’re definitely leading the pack for debt,” she said.

“There’s no one who’s really not affected by this. And we just reported that back in November that the most recent numbers for insolvency – that’s anyone across Canada who’s filed a bankruptcy or consumer proposal, we know that they’re now at pre-pandemic levels,” Stachiw added.

“That was before this increase so we know that’s just going to keep rising and that’s a scary thing.”

The best thing a person dealing with a heavy debt load can do is talk to a licensed insolvency trustee sooner than later, she said.

“The trustee is the only one who’s regulated in Canada to help you find those debt relief programs and potentially help you avoid having to file for bankruptcy.”

A consumer proposal is an option to avoid filing for bankruptcy.

While similar to a bankruptcy, a consumer proposal lets a person keep his or her assets such as house or vehicle. A consumer proposal action will reduce a person’s debt up to 80 per cent and is a five-year process of making monthly payments, Stachiw said.

Stachiw believes the country is on the cusp of a recession. Some analysts say the country hasn’t yet fallen into a recession because unemployment rates aren’t at the levels usually seen in a recession.

“That doesn’t mean we’re not right on that cusp of it,” Stachiw said.

The rate hike could be devastating for young families trying to buy their first home.

“Those stress tests are scary right now,” Stachiw said.

People buying a home or renewing a mortgage would be best to try to settle for a fixed rate.

“We anticipate that rates are going to continue to go up. We hear that maybe next year they’re going to go down but we are anticipating another announcement on March 8.”

She said variable rates “are really scary right now. It’s a volatile marketplace. To protect your assets, that’s the way to go.”

The rate hike is a hard hit for Canadians and thankfully it wasn’t larger, she said.

“There’s only so much you can take.”

Stachiw recommends Canadians get debt under control to weather the storm and says even saving $10 a paycheque can be helpful in the long-term. An emergency savings account will help people avoid putting money on a credit card when an emergency arises.

“Saving is always going to help you.”

The average Canadian household is only $200 away from having to file for debt relief, Stachiw said.