Rising Interest Rates Will Likely Not Affect You As Much As You Think

By Myles Slocombe

CIBC World Markets recently released a new report that showed that Canadians are taking advantage of record low interest rates to buy homes and in turn incurring higher debt loads; however, CIBC suggests that recent lending activity is not leading us down the path of a U.S. style meltdown*.

The report includes an in-depth look at the Canadian housing and mortgage market, and does share the same concerns the Bank of Canada has with Canadians having to be prudent about adding further debt levels.

There are a number of factors that buffer Canadian homeowners from being saddled with mortgages they cannot afford.

Mortgage credit is now rising at a year over year rate of more than 7%, with the household debt to income ratio at an all time high.

The rapid rise in housing activity in the face of recessionary conditions elsewhere in the economy has raised questions about whether house prices have risen too quickly given current economic fundamentals.

The problem that the Bank of Canada is having is that it is worried that Canadians are making themselves increasingly vulnerable in terms of their ability to continue to service the new, higher debt loads they are taking on.

Now it has been made clear that the reality in the past showed that interest rates have played only a minor role in driving mortgage default rates. It was shown that there is little or no correlation with changes in interest rates.

Personal bankruptcies have actually risen twice as fast in an environment of falling interest rates than in an environment of rising rates.

As you might be able to tell, the logic behind this is that interest rates rise when the economy is recovering, and the benefits to employment and incomes of an improving economy offsets the higher interest rates on debt service costs.

In the latest Financial System Review by the Bank of Canada, it is estimated that at  present, only 5.9% of all Canadian households are vulnerable to rising interest rates since their debt payment accounts for more than 40% of their household gross income.

The Bank of Canada also estimates that this figure will climb to 8.5% by 2010 if interest rates jump 3 percentage points.

For those who have been worrying about the future, this may be able to put your mind at ease. With the figure quite low for those who can be hurt by rising interest rates, the chances of you being in that margin is just as low.

*For your reference, here is the report:  research.cibcwm.com/economic_public/download/sdec09.pdf

Myles Slocombe is a Sales Representative with Royal LePage R.E.S./Johnston & Daniel Division. Myles is also a regular contributor to the Muddy York Blog.  Myles’ web site is located at www.keystoneconnect.ca

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One response to “Rising Interest Rates Will Likely Not Affect You As Much As You Think

  1. Canadian banks have done a very good job in ensuring that we all kept our heads above water during the recent economic turmoil.

    Nice post!

    Best Regards,
    Neil.

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