Effects of interest rate hike may be overestimated

The aim of recent warnings from government and bank officials about the rising level of household debt was to prepare Canadian consumers for the inevitable rise of interest rates at some point in 2011. The effects of higher interest rates should not be overestimated however.

The aim of recent warnings from government and bank officials about the rising level of household debt was to prepare Canadian consumers for the inevitable rise of interest rates at some point in 2011. The effects of higher interest rates should not be overestimated however.
 
According to a report from National Bank Financial, although Canadian household debt is at a new high relative to disposable income, only a minority of households are exposed to an interest-rate shock.
 
“It’s not that Canadians are throwing money out the window,” said Yanick Desnoyers, assistant chief economist at National Bank Financial. “Rather they are buying more houses, taking the homeownership rate to a record 70 per cent. Since very few homebuyers pay cash, the resulting indebtedness is hardly surprising.”
 
According to the report, 40 per cent of homeowners have no mortgage (compared to 31 per cent in the U.S.). Since about 30 per cent of Canadians are renters, that leaves 58 per cent of households paying no mortgage interest. Moreover, the net equity of owners in their homes is very high, more than 60 per cent compared to 39 per cent in the United States.
 
Also favourable is the mix of mortgage types. Two out of three mortgaged homes have a fixed-rate mortgage, leaving only 14 per cent of households paying a variable rate.
 
“In other words, the great majority of Canadians are not exposed to a monthly-payment shock from a rate rise,” said Desnoyers. “Though a larger proportion of households have home-equity lines of credit, all at variable rates, it remains that a rise in interest rates will not be an overnight blow to the bulk of households.