Bank of Canada interest hike concerning for those carrying debt

The Bank of Canada has raised its key interest rate a full percentage point — and that could spell out bad news for many Canadians who are carrying large amounts of debt.

The rate now sits at 2.50 per cent as the central bank tries to get inflation under control.

But some financial industry experts warn the aggressive increase could hit some people right away.

“So interest rates impact their mortgages immediately if they’re in a variable rate. It impacts their mortgages upon renewal if they’ve got a closed rate. It impacts their lines of credit immediately, impacts personal loans that are flexible immediately,” explained Laurie Campbell with Bromwich and Smith, a debt relief and consolidation company.

She’s worried about what will happen in the short term, especially when you look at recent numbers about Canadians’ spending.

“I’ve got to tell you honestly, it’s bad. We’re looking at for every dollar a Canadian makes, they owe $1.86. To put that in perspective, in 1990, for every dollar a Canadian made, they owed 90 cents. So we’re more than double that rate today,” Campbell added, noting many Canadians have been holding on by a thread — mostly because they’ve been tapping into home equity and relying on credit.

“Canadians are holding on by a thread because they’ve been tapping into their home equity — we know this happens in large, urban centres. They’ve also been relying on credit. And let’s not forget, during COVID, there was a real reprieve from creditors, they weren’t actually collecting on outstanding debt. On top of that, the CRA is collecting aggressively now as well, especially with individuals who may have collected CERB and did not qualify over that period.”

‘Making some tough choices’

The Credit Counselling Society has seen a double-digit hike in the number of people seeking help.

“In terms of the average indebtedness for the average Canadian, excluding mortgages, it’s a little over 20,700. Here in B.C., it’s a little over 21,000. And for a lot of those people, that means credit card debt,” Scott Hannah, the chief executive officer of the society, said.

“I think for a lot of people they’re going to have to reconsider whether or not they can maintain their home. For those people who are carrying large, variable debt, it’s a matter of making some tough choices.”

Hannah says the society is already hearing from people whose paychecks are “stretched beyond belief” and who are trying to figure out how to pay off their debt.

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The Bank of Canada’s rate hike of 100 basis points is the largest single hike since August 1998. The central bank has noted it expects to raise rates further.

“The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation,” the bank said in a statement Wednesday.

Campbell says many Canadians are in a “very perilous situation,” especially amid record inflation rates.

“Really, nothing that the feds have done so far has curbed inflation,” she told CityNews.

Campbell says Bromwich and Smith hasn’t “seen a marked increase in insolvencies — yet.” But that could soon change.

“My guess is that we’re going to be seeing a significant increase in insolvencies in the fall as these interest rates and inflation on top of that start to impact individuals over a period of time,” Campbell explained.

The increase comes after a difficult few years for many people across the country. Campbell notes the pandemic led to major job loss, with some people either left “unemployed or underemployed.”

Inflation has only further added to the stresses people are facing.

“Add this increased interest rate, we’re going to see a lot of Canadians who feel a huge amount of anxiety. And the unfortunate reality, and this is very, very sad, is that people don’t talk about money, they don’t talk about debt. So they feel like they have nowhere to turn, they feel like they’re alone in their crisis, and the reality is many, many Canadians are in the same boat,” Campbell said, urging Canadians to try to get their debt under control sooner than later.

Hannah adds while this may be a serious situation for many, it doesn’t have to be “doom and gloom.”

“If they haven’t already done so, I would encourage everyone to have a hard look at their budget to see where they can get some reductions with minimal impact on their lifestyle,” he said.

“It’s important that if people, if they’re not sure where to turn, get help from a trusted source.”

Recession worries

Earlier this month, a senior economist with the Canadian Centre for Policy Alternatives published an analysis warning that the Bank of Canada hiking interest rates too quickly could send the economy into a recession, with many people ending up being collateral damage in the bank’s quest to address inflation.

“The promise of the rapid interest rate increases from the Bank of Canada has been that we can get a soft landing, which is to say we can decrease inflation but do so in such a way that we don’t get a recession. So my question was, has this actually ever happened before? What’s our success rate at getting this kind of soft landing when we need to decrease the inflation rate from where we’re at — 7.7 per cent — down to the bank’s target, which is two per cent?” David Macdonald told CityNews on July 7.

The answers to those questions, however, were “a bit disappointing,” he said.

“We have a zero per cent success rate of getting there. We have had three instances where we have seen that level of decline, the trouble is each one of them was accompanied with a recession,” Macdonald explained, noting those three times were between 1974-76, 1981-83 and 1991-92.

On average through those three periods, the economy would have lost around 850,000 in today’s population, he added.

-With files from Patricia D’Cunha, Mike Eppel, Kurtis Doering, and Kareem Gouda