Total household debt relative to disposable income has been trending higher as indebtedness has been rising faster than incomes, with mortgage debt being a major contributor, counting for two-thirds of all outstanding household debt in Canada.
"Households with elevated levels of debt are more vulnerable to increases in interest rates", the Canada Mortgage and Housing Corporation redundantly observes in its latest bulletin and warns that "with interest rates on the rise, highly indebted households could see their increased required payments exceed their budgets."
Naturally, this increased debt payment burden usually come at the cost of reduced consumption, decreased savings or opting to make lower repayments on principal amounts. Some households might even default on their loans if their incomes are not sufficient to cover higher expenses and credit charges.
And, as the CMHC ominously warns, if an increasing number of borrowers begin to default on their loans, financial institutions may decrease lending activities in response...
The composition of debt influences how quickly changing interest rates impact households. Line of credit loans and mortgages with variable interest rates would be the first to feel the impact of higher interest rates. Consumers holding existing credit products with fixed interest rates, such as auto loans, would not be affected at all on these items. Given that three quarters of mortgages have fixed rate terms, rising rates would not impact these loans until renewal. A rise in the mortgage rate would impact about half of all mortgage loans within the first year following an increase.
The effect on household finances following a hike in interest rates is a function of how quickly debt service charges increase. Analysis of debt composition by metropolitan area provides comparisons on how quickly various shares of household debt are impacted by a change in interest rates. Segmenting the DTI ratio by debt product provides the share of each product’s debt burden relative to income....
https://www.zerohedge.com/news/2018-12-30/canadian-household-debt-income-ratio-near-record-high
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