Nearly One Million Canadians May Struggle When Interest Rates Rise

TORONTO, ON--(Marketwired - September 13, 2016) - A new study by TransUnion (NYSE: TRU) found that the large majority of Canadians would not be materially impacted in the near term by an interest rate increase. However, more than 700,000 consumers could struggle with their finances even with a ¼-point hike, and up to one million borrowers may not be able to absorb the increase in their monthly payments if interest rates rise by 1 percent.

"Despite rising debt loads for Canadians, our study found that the far majority of consumers will be able to manage an interest rate hike of up to one percent," said Jason Wang, TransUnion's director of research and industry analysis in Canada. "Our assessment, though, identified a subset of the population of nearly one million borrowers who may face financial challenges when rates rise."

Interest rates in Canada have remained low for several years, and the Bank of Canada Target Overnight Interest Rate currently stands at 0.5%. This is the benchmark interest rate set by the Bank of Canada at which major financial institutions lend overnight funds among themselves; changes in this target rate influence other interest rates, including the Prime business rate, currently standing at 2.7%. Most lenders price consumer loans and mortgages based on the Prime rate plus some margin.

The Target Overnight Interest Rate peaked near the end of 2007 at 4.5%. Since then, it declined to a low of 0.25% (where it remained for much of 2009) and now stands just above that level at 0.5%. It is expected that this and other interest rates will rise in the future, though the timing and magnitude of any rate increases remain uncertain.

TransUnion's study determined that there are more than 26 million credit-active Canadian consumers, and on average, they carry 3.7 credit products each. The study focused on two major types of debt that carry variable interest rates that typically adjust when benchmark interest rates change: lines of credit and variable-rate mortgages.

Approximately 7 million Canadian consumers carry at least one of these two variable interest rate debt types. These loan types are most impacted by interest rate changes and can create a payment shock -- the increase in borrowers' monthly payment obligations that they cannot control.

Rate Hike Will Impact Several Hundred Thousand Consumers

While the far majority of Canadians will not be negatively impacted in the near term by an interest rate increase, there is a material subset of the population that may find it difficult to absorb an increase. The study found that a ¼-point interest rate increase may seriously impact 15% of the population that currently has a variable-rate mortgage, a line of credit, or both. These consumers would see a $50 or more increase in their monthly payments. A ½-point interest hike and a 1-point increase would cause 30% and 40%, respectively, of the above-mentioned population to have a monthly payment shock of $50 or more.