Increasing Interest Rates Could Cost More in Debt Repayments

Now imagine if interest rates were to go up by just one percentage point the next year, it implies that for every $1 of income, Canadian homes would have to spend a supplemental 2 cents on debt repayments, Says a new RBC report.
Canada’s median household income of $78,870 plus the increase gives an estimate of roughly $130 more in monthly debt servicing costs.
This is happening in a country where over half of its population after meeting all their debt obligations and paying their bills actually have $200 or less per month to spare.
The financial cushion is $100 or less for 10 per cent of the Canadian population.
With the Canadian economy seemingly unstable and rise of interest rates in the U.S, most economists think the Bank of Canada should increase rates sometime next year.
So how do we expect Canadian families, who have piles of mortgages, credit cards and other loan balances for the past decade,  to cope with a more expensive debt?
According to RBC economist Cooper, the amount of interest paid by Canadians on credit cards and personal lines of credit is unilaterally equal to what they channel towards their mortgage debt interest.
Reason being that, consumer credit is way more expensive even though mortgages make up a majority of household debt. While Canadians can well receive a five year fixed rate mortgage with low interest rate of 2.5 per cent, several unsecured credit lines carry rates of 7-9 per cent. Interest rates on credit cards are in the double digits.
This consumer credit rather carries variable interest rates that might presumably rise if interest rates level increases.

#One in 10 older households owe $100,000 and above

Can you guess who holds more of that pricey debt with variable interest rates? Seniors, says cooper.
Most Canadians ranging from 65 and above had an average household debt of over $30,000 in 2016 in contrast to $10,000 in 1999. Lines of credit accounts tend for most part to increase just when income falls due to retirement.
Hence a staggering 10 per cent of senior households had a debt in excess of $100,000 in 2016.

#This does not affect all Canadians

Nonetheless, not everyone will be predisposed to an increase in interest rate. Canadians who lock in interest rates via a fixed term mortgage won’t be affected by the rising rates until their loan expires. Shockingly, most homeowners after refinancing their mortgages come to realize that the rates are still lower than what they carried on their previous loan.
Also about half of the Canadians have little or no debt and a quarter owed less than $25,000.


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