Interest rates to contribute to spending slowdown says CIBC

Report looks at impact of rate rises on household finances

Interest rates to contribute to spending slowdown says CIBC
Steve Randall

With further Canadian interest rate rises expected in 2018, research from CIBC Economics considers whether rises will break household finances.

Economists Benjamin Tal and Royce Mendes start from the rise in debt-to-income ratio of 171% and say that rising interest rates will pose the biggest test to Canadian borrowers since the Great Recession.

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The pair highlight that most Canadians’ finances are in good shape, and are somewhat protected from the impact of rate rises due to the way their debt is structured.

“The surprise will actually be how few Canadians will feel the full sting of rising borrowing costs in the coming year,” they write in their report.

Some facing severe impact
For some fully-exposed consumers, the impact of rising interest rates will be severe, CIBC’s economists say.

But for most consumers, the additional costs of borrowing will be manageable as despite rate rises being applied to different products in different ways, even for credit cards there would need to be a sharp rise in interest rates to prompt a significant rise for cardholders.

Mortgage rates are a concern for many homeowners, but Tal and Mendes note that most loans due to reset will do so at rates similar to those of 5 years’ ago. For non-fixed rates, it will be the amortization that changes rather than payments.

Although some consumers will face tough times ahead, the report calls for a $3 billion rise in aggregate debt servicing costs, which would typically only reduce consumer spending slightly.