Almost 1 million Canadians would be impacted by interest rate hike

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Despite rising debt loads, a new study released by TransUnion found that the majority of Canadians would not be materially impacted in the short term by an interest rate hike. However, more than 700,000 consumers may struggle financially even with a ¼-point hike, and up to 1 million borrowers may not be able to accommodate the increase in their monthly payments if interests rates rose by 1%.

A ¼-point interest rate hike could seriously impact 15% of Canadians who have a variable-rate mortgage, a line of credit, or both. Such consumers would see a $50 or more increase in their monthly payments.

"The size of the monthly payment shock is only one side of the equation," said Jason Wang, director of research and industry analysis at TransUnion of Canada. "For some, a $50 increase in their obligations may simply be managed by forsaking a couple of restaurant dinners and eating at home, while for some others, this may mean they would not be able to fill their gas tanks to get to work. So we need the other side of the equation: comparing the payment shock with consumers' available cash flow."

Interest rates in Canada have remained relatively low for several years, and the Bank of Canada Target Overnight Interest Rate remains constant at 0.5%. This is the benchmark interest rate set by the Bank of Canada at which major financial institutions lend overnight funds among themselves.
Changes in this target rate influence other interest rates, including the Prime business rate, which currently stands at 2.7%. The majority of lenders price consumer loans and mortgages based on the Prime rate plus some margin.

Meanwhile, the Target Overnight Interest Rate peaked towards the end of 2007 at 4.5%. Since then, it has declined to 0.25%, where it remained for much of 2009. The Target Overnight Interest Rate now stands just above that level at 0.5%. While this and other interests rates are likely to rise in the future, the timing and magnitude of any rate increase is always uncertain.

TransUnion determined that there are more than 26 million credit-active Canadian consumers. On average, these consumers carry 3.7 credit products each. TransUnion’s latest study focused on two major types of debt that carry variable interest rates that typically adjust when benchmark interest rates change: lines of credit and variable-rate mortgages.

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