Canadians have some of the highest levels of household debt in the world, which has some economists worried, now that interest rates are on the rise. But according to one bank, things aren’t as bad as they might appear.
“There are widespread concerns about the vulnerability of Canadian households to rising interest rates,” reads a recent report from the National Bank. “While some borrowers will undoubtedly be more sensitive to higher rates, the current structure of household debt suggests that the coming payment shock will be relatively subdued for the economy as a whole.”
The reason? As Canadian household debt has grown, the average disposable income has been keeping up. According to the National Bank, real disposable income has grown an average of 2.5 per cent per year over the last 10 years.
“Some pundits have been circulating inaccurate information recently,” reads the report. “One is the affirmation that almost half of Canadian mortgages have been or will be up for renewal this year, suggesting an imminent payments shock from the rise of interest rates…This is false…Since the great majority of mortgage borrowers opt for 5-year terms…it’s hard to imagine much more than 20 per cent of mortgage debt coming up for renewal each year.”
According to the bank’s interest-rate scenario, the rise of the interest rate for households exposed to rate increases should be roughly 0.33 per cent of their disposable income in 2018. The Bank of Canada hiked the overnight rate to 1.25 per cent in January, and is widely expected to do so again before the end of the year.
The bank is quick to note that a rise in the interest rate does not necessarily mean an equal rise in mortgage payments — the increase in payment at the time of renewal is roughly 60 per cent of the increase in the interest rate, while only 40 per cent of variable-rate mortgages have payments that are fixed over the term.
“With these two considerations taken into account, we calculate that the payment shock would amount to only 0.24 per cent of aggregate disposable income in 2018 and 0.26 per cent in 2019,” reads the report. “Considering that real disposable income has grown an average 2.5 per cent annually over the last 10 years, that’s a slight touch on the brakes, not the drastic slowdown of Canadian consumer spending mooted by the current buzz.”