A study published by Environics Analytics reported that Canadian debt holders were already starting to feel the pressure as the interest rates increased. With the new interest rate hike announced by the Bank of Canada on October 24th, debt holders’ spending and savings will come under pressure as the four major banks responded by raising their lending prime rates.
Interest rate increases by the Bank of Canada are not a new occurrence as there have been four other increases since July 2017. The reoccurring increases are a result of more optimistic economic forecast.
Higher Spending on Interests
The study shows that by the end of 2018, the average Canadian household will spend an additional $1,715 on average in interest, an increase from the $686 in 2017. Although this might sound an astonishing increase, the Bank of Canada has been testing the market with previous stress tests for new mortgages. “We advocated it for quite a long time before it became practice — that people should be self-testing” Stephen Poloz, Bank of Canada governor, said in a press conference on Wednesday.
Millennials and Generation X will be affected the most
While all Canadians will be affected, millennials and Gen X members will suffer the most. First-time homebuyers and young families living in new developments surrounding major cities have not spent long building their capital and will see an effect in their savings rates. This will come more prominent when looking at their higher interest payments on their mortgage.
However, higher interest rates are a sign of a stronger economy, which could lead to higher incomes. So although households will feel the pressure, it will be offset by the growth in household income.
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