The Bank of Canada, and in particular governor Mark Carney, have left little doubt about their intentions to use interest rates, if need be, to control what appears to be out of control debt borrowing by Canadians. The central bank has commented on the rising level of consumer debt for a couple of years now — those comments starting out as concerns and having finally reached the level of clear warnings that either Canadian household debt stops its rapid ascent or interest rates will need to rise. The reason for this is the concern that, like in the United States before the last recession, excessive household debt levels pose a greater risk to the economy than do higher interest rates.
Canadian’s are knee deep in debt, with Statistics Canada reporting that the most recent household debt-to-income ratio reached 163.4% in the second quarter of 2012. While part of the increase from the 150.6% reported in the previous quarter was due to a revision of how Statistics Canada calculates this ratio, the fact is that the ratio seems to be on a non-stop rising trend due to increased borrowing by Canadians as well as stagnant income levels in our struggling economy.
So how does all this affect interest rates and will it increase the number of Canadians who will need to file bankruptcy in Canada? Simply, the Bank of Canada sets the interest rate at which commercial banks lend funds to each other (called the overnight interest rate). If the central bank raises the cost of short term borrowing for Canada’s largest banks, the effect will be to trickle down to your mortgage, bank loan and line of credit. If you have a variable rate loan, your interest costs will increase almost immediately — increasing your monthly payments. If you have a fixed mortgage and it comes due while rates are higher, obviously your mortgage will be renewed at a higher cost.
If interest rates increase, you, along with many Canadians who purchased a home with little or no money down or who are relying on lines of credit and credit cards to make ends meet will be even more overextended. The Bank of Canada itself estimates that if rates return to a more normal level (from today’s historical lows) the proportion of households that are overextended will increase from 7% currently to 10%. That number is staggering. The annual consumer insolvency rate (bankruptcy and consumer proposals) in Canada was 5.1 per 1000 persons in 2010 (with 3.5 filing personal bankruptcy and 1.6 filing a consumer proposal). That same number was 5.9 bankruptcies and consumer proposals in per 1000 Canadians in 2009. Just how far will the number of Canadians filing bankruptcy in Canada increase when interest rates start to rise is the question.
How Can You Avoid Bankruptcy?
How will you weather the storm if interest rates increase? If you have debt, take action today to reduce those debts. There are options that will help you avoid bankruptcy, as long as you make a plan today, rather than waiting for interest rates to increase. If you have more debt than you can handle, talk to an experienced bankruptcy trustee about your debt relief options today.