Hear from the Bank of Canada: The era of record interest rates will soon end



It’s time to get your debt back in order.

This was not the immediate message the Bank of Canada sent a few days ago, but it is easy to telescope the central bank‘s announcement that it will hold its key rate in a future where interest rates will continue. will increase.

For borrowers, the question becomes: in what shape are we to manage these increases?

We saw the pressure on interest rates coming.

As we have already noted, inflation has turned out to be less transient – a central bank preferred term – than expected. You can smell it in the wallet, at the grocery store, at the gas pumps. And we’ve detailed examples of supply chain disruptions caused by a pandemic that won’t go away anytime soon. The bank acknowledged last week that supply bottlenecks have been much more severe, more widespread and more persistent than expected.

What’s worth noting now is the worrying level of debt exposure borrowers have taken on thanks to this handy home improvement catalyst: the Home Equity Line of Credit, or HELOC.

It was still midsummer when Equifax Canada reported what it called a worrying trend among HELOC holders. Strong mortgage growth combined with low interest rates fueled a rebound in borrowing. Here is a striking figure: The volume of new HELOCs increased by 57% in the second quarter of this year compared to the previous year. This is the highest in a decade.

The credit bureau has expressed an obvious concern: With many consumers in high debt, increases in variable rate mortgages and HELOCs can leave borrowers in a position where they are unable to repay their debts. By comparison, rising interest rates in 2018 led to an increase in bankruptcies among senior consumers with home equity lines of credit.

We do not foresee a disaster. But be aware that inflation, of 4.5% for readers who like to follow the numbers, should approach 5% by the end of the year.

That’s a far cry from the bank’s primary goal of two percent. And that surprised policy makers. With inflation higher and longer than expected, Bank of Canada Governor Tiff Macklem worked last week to reassure Canadians that inflation will be under control.

As a result, the central bank now expects interest rates to be raised sooner than expected. Macklem has named the middle of next year as the new time to watch. But he also defined the “middle” as the second and third quarters of the year. So, according to our calendar, next April becomes a turning point.

Some variable rate borrowers may have forgotten that the bank’s central rate was lowered to a previous 0.25% at the end of March 2020, in response to the pandemic. Some long-term homeowners may recall that the quarter percent interest rate was last seen in the spring of 2009, as the bank responded to the global recession caused by the financial crisis.

In other words, neither of the two scenarios can be defined as normal.

HELOCS were launched through the mortgage market, primarily revolving lines of credit guaranteed against the value of a residential building. Quick and flexible access to cash is a common argument from lenders to borrowers, who exploit them for kitchen renovations, debt consolidation, emergency maintenance, or perhaps a liquidity squeeze imposed by a pandemic.

Now is the time to take stock. The central bank has put borrowers on notice to get their finances in order. The era of historically low interest rates will soon be over.


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