High levels of debt mean many B.C. households may be under serious financial pressure once a long-expected climb in interest rates finally begins.
British Columbians had an average of $99,834 in household debt in 2014, according to a new survey by Pollara conducted for BMO’s annual debt report.
That’s up more than 26 per cent from $79,089 in 2013.
According to the report, 58 per cent of B.C. households carry credit card debt despite the high interest rates they charge. That’s well above the national average of 52 per cent. It found 44 per cent in B.C. have mortgages and 10 per cent have student loans.
Seventy-one per cent of B.C. respondents with household debt said they would be stressed if interest rates rose two points – significantly more than the national average of 64 per cent or 59 per cent of Albertans who said a two-point hike would be stressful.
“The sizable number of indebted households that would feel very strained by a relatively moderate increase in interest rates is concerning,” BMO senior economist Sal Guatieri said.
“This is a worrisome side effect of a prolonged period of low interest rates and needs to be closely monitored, especially if rates continue to fall.”
Guatieri said the rising household debt levels may be partly explained in some areas by rapidly rising home prices that spur buyers to take on larger mortgages.
Bank officials say an eventual rise in rates to normal levels is inevitable and families should stress-test their ability to withstand the increase and manage their finances in a higher rate environment.
A typical Surrey house now selling for $689,000 requires mortgage payments of $2,840 a month, assuming a 2.7 per cent rate, 10 per cent down payment and 25-year amortization. A two-point rise to 4.7 per cent would take that payment up to $3,500.
Too many people in the Lower Mainland in particular are buying homes at prices that leave them barely able to cover the mortgage and associated household costs, said Gary Tymoschuk, vice-president of operations for the Credit Counselling Society.
“Then you throw on an extra credit card or two and it makes it very tight in terms of managing all the debt,” he said.
The society is already called on to help significant numbers of people in financial trouble but it expects the need to increase when rates climb.
“A lot of British Columbians are living pretty close to that wire in terms of our overall indebtedness versus what we can afford to pay,” Tymoschuk said. “The smallest little tick up in the interest rate could certainly negatively affect a lot of people and put a lot of stress on their household budgets.”