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More than 700,000 Canadian borrowers could be facing payment shock on their debt obligations if interest rates rise by a quarter point, and that rises to as many as one million people should rates go up by 1 per cent, says a study by credit monitoring firm TransUnion.
In a one-quarter-point increase scenario, 718,000 consumers – about 3 per cent of the population of 26 million credit consumers – would see a $50 or greater hike in their monthly payments, the report released Tuesday found.
An additional 253,000 consumers might be in financial difficulty if the rate were to rise by a full percentage point, the results indicate.
"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 1 per cent," TransUnion director of research and industry analysis in Canada, Jason Wang, said.
"Our assessment, though, identified a subset of the population of nearly one million borrowers who may face financial challenges when rates rise."
Less risk-prone consumers might offset a $50 increase in monthly debt obligations by foregoing a restaurant dinner or two, but for others the difference might mean not being able to fill their gas tanks to get to work, Mr. Wang points out.
"Many consumers do understand, but unfortunately some consumers have, in the last few years, developed a false sense of security, thinking that low rates are going to be here forever," he said.
The TransUnion study relied on extensive data on consumers' available cash flow and capacity to absorb increased payments.
Last week, the Bank of Canada again held its key rate at 0.5 per cent and cited a disappointing export sector as having dampened growth prospects for the country.
With continued uncertainty and sluggishness in the major global economies, including Canada, many economists and observers don't expect the central bank to raise rates until at least the first quarter of 2018.
Scott Hannah, president and chief executive officer of the non-profit Credit Counselling Society, said he's concerned that people at risk might not take action soon enough as interest rates start to go back up.
"The increase is coming. It's how you prepare yourself for that increase. Now is the time to get prepared," he said in an interview.
"A lot of people have variable-rate mortgages. People don't take action until the rate is up a full one [percentage point]."
Diana Petramala, economist at Toronto-Dominion Bank, said in an e-mail that most households "are currently in an okay position to weather a modest increase in interest rates. The biggest risk is potential for a housing market correction, that would have knock-on effects to the overall economy, credit lenders, and household balance sheets (through decreased equity), and then delinquency rates would rise."
TransUnion's study indicates that there are more than 26 million "credit-active" Canadian consumers. On average, they carry 3.7 credit products each. The analysis focused on two major debt types subject to interest-rate variations: lines of credit and variable-rate mortgages.
About seven million Canadian consumers carry at least one of those two types of debt. The report defines payment shock as "the increase in borrowers' monthly payment obligations that they cannot control."
Lenders should pay particular attention to the findings "as hundreds of thousands of borrowers traditionally believed to be low-risk consumers may suddenly become risky," Mr. Wang said.
"While lenders expect subprime consumers to be risky, this sudden change in prime or better segments may come as an unpleasant surprise. Based on this study, we recommend lenders evaluate their own portfolios in a similar manner to determine who might be vulnerable to a payment shock among their customers, and work with those customers to ensure their accounts remain in good standing."