This is explored in my latest article, which is in Monday’s Financial Post (e-paper and online). You can access it by clicking on this self-explanatory highlighted headline: Only a quarter of Canadians have a rainy day fund, but more than half worry about rising rates.
It describes a new Forum Research Inc. poll that shows more than half of Canadians (51%) fear rising rates will negatively impact their personal finances. The national poll of 1,350 voting-age adults was conducted after the Bank of Canada raised the prime interest rate from 0.75 to 1% on September 6th, which in turn followed an initial 0.25% hike in July.
After an amazing run of nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. Little wonder that many homeowners are starting to “lock in” to fixed mortgages while rates are still relatively low.
Of course, as Credit Canada’s Laurie Campbell notes, for the longest time it’s paid to stay variable and flexible, whether with a variable-rate mortgage or a line of credit. It does cost a bit more to “lock in” to fixed mortgages, as Campbell notes, but the ability to sleep well at night in my opinion more than makes up for the difference.
While the poll asked specifically how consumers felt about the second hike, “they are worried more are coming,” Forum Research president Lorne Bozinoff told me. 12% say the negative effect will be extreme. However, 17% believe rate hikes will have some positive aspects: you’d expect debt-free seniors to welcome higher returns on GICs and fixed-income investments. Another 38% don’t think it will have an effect either way.
A quarter have no emergency savings at all
Bozinoff is more concerned that 26% of respondents have no emergency savings, and 40% have a cushion of a month or less: 9% have less than a month and 11% just a one-month cushion.
Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14% have two to three months, 9% four to five months, and 13% six months to a year. Only 15% have a year or more and predictably, 56% of the latter group are 55 or older.
Poll skewed by age: Millennials in “precarious situation”
The poll skews by age, with the young in a “really precarious situation,” Bozinoff said. More than a third (35%) of Millennials aged 18 to 34 have no savings at all, while another 10% have less than a month.
Given the high cost of housing in major cities, it’s not surprising that 60% of young people are at least “somewhat concerned” by the prospect of rising rates, as are those of any age with minimal wealth (57%). Older people and/or the wealthy are less concerned: 28% of those 55 to 64 and 31% of the 65-plus group aren’t too worried; neither are the wealthy (33%). But that’s what you’d expect: well-heeled elders have little or no mortgage debt and likely bought their homes when they were much more affordable.
BMO Financial Group chief economist Doug Porter says the Forum findings speak “directly to the widespread concern around the build-up of household debt: the results suggest those concerns are well-founded.” He expects the Bank of Canada will be very cautious about another rate hike. After the September move, it said it would monitor the economy closely to see how sensitive borrowers are to higher rates. The Forum poll “suggests they are very sensitive indeed,” Porter said in an email, “This doesn’t mean the Bank will stop raising rates; just that they will be extremely deliberate and cautious in doing so.”
Any future rate increases would be relatively moderate, Porter says, “When we return to ‘normal,’ normal will be a lot lower than in the past.”
Time to lock in to fixed mortgages?
Bottom line? In my view, interest rates are still very close to their historic lows and some time in the next few years, homeowners may look back at 2017 as one of the last best chances to lock in at still reasonably low rates. If you don’t think so, ask baby boomers who bought houses back in the early 1980s and paid rates in the high teens.
True, at least house prices were low back then, relative to today’s lofty levels. But today’s young people are in the opposite situation: elevated home prices and still-low interest rates. A combination of high prices and high interest rates is a scary prospect, one that the Forum poll uncovers. You may not be able to do much about high housing prices, other than deciding to rent or moving to the country, but you CAN control how much you pay on your mortgage.
Why, to use Laurie Campbell’s phrase, play Russian roulette by continuing to stay variable? I don’t have a mortgage any more myself but if I did I’d certainly lock in now into 5-year fixed terms or even longer if available. Meanwhile, seniors who are debt-free would as the poll implies welcome the prospect of receiving more interest on their GICs and other fixed-income investments.
The interest rate glass is half full!