Canadian borrowersawfully close to theedqe, Studv warnsE?Vtiuzzt 'sa u,<nt41Hundreds of thousands would haveproblems with a small rate increase/l SEqarpt48K -Zaf,6GAR'IY MARR.
T0R0NT0 There are more thanTOO,OOO Canadians who might bewatching the next Bank of Canadadecision very closely, because evena modest interest rate increasecould push them over the finan-cial edge.
A new study from credit agencyTransUnion shows that of t}re26million credit-active Canadians inthe country 7\8,OOO can't absorba 25-basis point increase or theYwonlt have enough cash fl owto cov-er their debts. Raise rates one per-centage point, something not likelyto happen overnig;ht, and 971gOOCanadians end up in a cash crunch.
The next interest rate announce-ment is notdueuntil mid-Octoberbut the consensus among econo-mists is there won't be a rate hikeuntil the third quarter of 2017.Thatmaybe part of the problem, sinceconsumers have come to expectrates will never go up and are nowborrowingbased on a prime lend-ing rate of 2.7 per cent.
"I would say for five or six yearsinterest rates have been so low, alot of these consumers look OKbeeause of the low rate environ-ment. This is one of the things weare looking at " said Jason Wang,director of research and industryanalysis with Chicago-based Tran-sUnion. "If everything changes and
interest rates are higher, and theyhave to pay more on a monthlyba-sis back to lenders, theymay not beable to handle (an increase)."
The report looked at so-calledsuper prime customers - thepeople withbest credit and scoresin the 830-900 range - who makeup the largest segment of thecredit-holding population whocan afford an increase of 25 basispoints. Of super prime custom-ers, TransUnion says a 25 basis
.,point increase to interest rateswould cause cash-flow trouble for239,OOO. Only 1Ol,0O0 Canadiansborrowingwith sub-prime ratinggin the range of 3OO-599, would facethe same cash crunch under thosecircumstances.
Wang said the super-prime cus-tomers are far more leveragedand therefore more vulnerable toan interest-rate increase. If ratesrose one percentage point 298,000super-prime customers would facecash-flow problems.
On average, credit-active Cana-dians carried 3.7 credit products,TransUnion said. The study fo-cused on two major types of debtthat carryvariable rates, includinglines of credit and variable-ratemortgages.
The message to consumers is topay down debtbefore interest ratesstart to rise, while issuers need tolook at their books.
"Take a look at theig prime- andsuper-prime customers to seeif they have a problem, becausethese are the people who will besurprised," Wang said. "We don'twant creditors to be surprised."
Laurie Campbell, executivedirector of Credit Canada, saidhigh quality customers havebeenbuilding up debt because they'reattracted to low rates that neverseem to rise.
"There is an assumption thatthose with better income and good(credit ratings) are in good finan-cial shape," Campbell said. "Itt notthe case atall.We see people inouroffices all the time that should bemanagingwell that are not due toa number of factors. One is overextension, they're biting offmorethan they can chew."Financial Post
We see peopleinour officesallthetimethat shouldbemanaging ueltthatarenotdueto anumber offactors. Oneisouer extension,thegrebiting offmorethanthegcanchelD.
Over-extended Canadians could end up in a cash crunch if interest rates rise,a study from credit agency TransUnion shows. rru-Dn ANDERIIN/FTLES
