Bank of Canada rate cut will lure Canadians deeper into debt, say experts

Debt experts worry even lower lending rates will tempt some Canadians to pile on more debt.

Some debt experts worry that the Bank of Canada’s slashing of interest rates will lure deeply indebted Canadians to slide even deeper into the red.

On Wednesday, the central bank cut its benchmark lending rate to 0.5 per cent. The move is designed to boost a sputtering economy with added spending. But some fear troubled times ahead for those inspired to rack up more debt at a cheaper rate.

“The more debt you have, the greater your chances of going bankrupt, it’s simple math,” says bankruptcy trustee Doug Hoyes.

Murad Ali sees the rate cut as a gift because it gives him justification for taking out another loan.

“It’s Christmas in summer,” he says.

Home equity lines of credit

Murad Ali, his wife, Arsheen Haji, and their daughter, Shanzé, pose in their custom kitchen, paid for with a home equity line of credit. (Sophia Harris/CBC News)

When CBC News first interviewed Ali for a debt story last month, he already owed about $400,000 in lines of credit — money that he used to fund everything from renovations to trips to designer goods. The big spender wanted to get another loan but was hesitant to add to his bills.

But now that chartered banks are lowering their lending rates, Ali tells CBC News he’s decided to switch to a cheaper variable mortgage and finally get that longed for additional line of credit. He estimates he’ll borrow about $50,000 to buy more furniture for his new Richmond Hill, Ont., home.

“[I’m] very excited. Everything’s a risk but it’s a much more managed risk,” he says, because of lower rates.

Fuelling the fire

‘If you make [lending] cheaper, people are ultimately going to be borrowing more.’– Doug Hoyes, bankruptcy trustee

Rock bottom interest rates are spurring many Canadians to rack up more debt and another rate cut may only help feed the frenzy.

“If you make [lending] cheaper, people are ultimately going to be borrowing more,” says Hoyes.

According to Statistics Canada, the ratio of household debt to disposable income was near record levels at 163.3 per cent for the first three months of the year. That means for every dollar of disposable income in a typical year, Canadians carry about $1.63 of debt.

The Bank of Canada lowered its key lending rate to stimulate spending and investing in a sluggish economy. But even central bank governor Stephen Poloz acknowledged that the move could put some Canadians at risk because of mounting debt.

“Of particular note are the vulnerabilities associated with household debt and rising housing prices. And we must acknowledge that today’s action could exacerbate these vulnerabilities,” he said on Wednesday.

However, Poloz warned the risks could be even greater if the economy went unchecked and spiralled out of control thanks to triggers “such as a widespread and sharp decline in economic activity and employment.”

But what if rates go up?

Hoyes believes there will also be dire consequences if Canadians continue their spending binge. He reports that, for the first half of this year, he’s already seen a 20 per cent increase in personal bankruptcy cases at his firm, Hoyes, Michalos & Associates, which services clients across Ontario.

Hoyes predicts bankruptcy numbers will skyrocket when interest rates go up and people are saddled with ballooning debt payments. “No one’s ever thinking about the future and that’s my biggest worry,” he says.

Ali admits rising rates could lead to financial troubles for him. But he also sees no scary signs on the horizon. “The last time I heard interest rates were going to rise was around 2009 or something and ever since then, it’s been going down and staying down.”

“Never say never,” warns Patricia White, executive director of Credit Counselling Canada. “I bought my first house when interest rates were 20 per cent,” she says, recalling when rates spiked in the early 1980s.

Pay down debt

White also worries about the lure of even cheaper money for indebted Canadians. So she’s advising people to pay off their loans now while interest charges are so low.

“If you’ve got a line of credit and it’s up there, why not pay that down and pay less interest on it?”

That’s exactly what Rasho Donchev is doing. On top of his mortgage on his Oshawa, Ont., home, the college support worker owes $30,000 on a line of credit.

But rather than get another loan, Donchev has decided to work on becoming debt-free.

“True, money is cheap right now,” says the married father of two children. “We’ve been waiting for years to build a deck in the backyard and there are a couple trips we’d like to take. But as much as there is a temptation, there’s got to be some discipline.”

It may be a shrewd decision for him. But, at least for the short term, his frugal move won’t help boost a faltering economy.

Source: Sophia Harris, CBC News Posted: Jul 17, 2015 5:00 AM ET

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