Are Canadians Prepared for Higher Interest Rates?
Just like the question we answered earlier this morning, here’s another that has been asked for years: are Canadians prepared for higher interest rates? According to the federal government, no we’re not. And while that might be true, it might not have as much to do with the home equity loans and HELOCs they’ve been talking about for years. Rather, it might have everything to do with the fact that every economy around us is nearly coming to halt.
Just a mere mention of Greece, and Canadians start to shudder. In fact, make any mention of Europe at all, and it’s enough to get us looking down into our coffee cups muttering about how the same thing couldn’t happen here. But couldn’t it? Greece went bankrupt simply because the country had more debt than it did economy – and if our government doesn’t get our deficit under control and consumers don’t get their own debt under control, there’s nothing from stopping the slowdown from making its way overseas.
And it may not even have to. The American economy is much closer to us, and although not as weak, it’s still not as the full strength they had hoped to be by now. A lack of jobs and too much debt has made that recovery very slow-going, even though they’ve been keeping their interest rates at near zero for a longer period than we have.
So can Canadians handle an increase in interest rates? The very simple answer is “no,” and that’s why Bank of Canada governor, Mark Carney, hasn’t raised them. But, we might also not be able to handle the amount of debt we have, even if they never come. Finance Minister Jim Flaherty has warned us about using things like HELOCs as an ATM, pulling on them whenever we want, and never thinking about the day that those funds need to be repaid. And the warning should not be dismissed.
As Greece went bankrupt, there was an almost palpable slowdown in borrowing, and housing values plummeted. When the U.S.’ economy started to take the same kind of nose-dive, again people stopped borrowing and started worrying about how they were going to stop their mortgage from going underwater. As people continued to lose jobs in both Greece and the U.S., people started to tighten their belts because they knew they couldn’t afford the debt they had, let alone that debt with higher interest rates.
And it seems, while countries all around the world have been tightening their belts, we at home have been watching – and spending. Taking out more in debt every day and not worrying about what tomorrow will bring. Are our households in too much debt? Most certainly. And it’s this simple fact that is why we also most certainly could not afford interest rates to rise at this point.