Will you be caught short if interest rates rise

Are you one of the 40% of homeowners in Canada that didn’t quite have enough money between paydays to keep your life going?  That’s how many Canadians are out there – four in 10 – that were caught short in the last 24 months according to a new survey just published.

This dismal picture was captured by Manulife Bank, which issued the survey results along with a warning that rising debit among Canadians could present a crisis among those homeowners that couldn’t absorb the extra expense that rising interest rates could bring. The banker also discovered that this is a troubling issue across every province and not just in major markets where expensive housing and huge mortgages are an issue.

Manulife Bank of Canada surveyed more than 2,300 homeowners across Canada aged 59 and younger that report household earnings above $50,000 a year. The online poll was conducted in February 2016.

The findings included information on how big Canadian mortgages are and the ability of homeowners to service their mortgages.  The average mortgage is $181,000 as of February, which is $6,000 more than what a similar survey six months prior indicated.  It is fortunate, according to Manulife Bank officials, that the rate of a 5-year fixed rate closed is less than 2.5% which is a record low. But what happens when that rate goes up.

As of this latest poll, about 4% of participants indicated that they don’t have sufficient funds in their bank accounts to pay their monthly expenses on a regular basis.  A further 10% of respondents said they have a short fall a few times a year and 23% say that once or twice a year this is an issue.

The survey was conducted across Canada but Manulife broke the stats down into regions to see if there was a particular area of the country that fared better or worse.  Even in markets such as Toronto or Vancouver, the percentage of participants that are caught short on occasions didn’t change.  The only change in numbers was with how big mortgages are regionally, with Vancouver coming in with the highest average mortgage debt at $259,000.

The poll included questions to homeowners about where they find resources during those times when the money doesn’t stretch and often they find more expensive debt instruments, such as high interest credit cards, to make it to the next payday.

In looking forward, Canadians should be concerned about how their current budget shortfalls affect their future savings and retirements options.  Less than half of those respondents are quite confident that their current lifestyle can be maintained come retirement while 44% rate their confidence as moderate with 14% saying they’re not very confident at all.  Two per cent indicated that they have no idea.

The very first thing that Manulife Bank recommends for Canadians who find themselves in uncertainty is to take an audit about where their money is going.  A latte a day at $5 can add up.

Some Canadians did indicate that they have some sort of plan going forward.  Some believe they can bank on equity in their home to keep them afloat during retirement.  About a quarter of those respondents currently in their 50s say that the equity in their home is about 80% of what they think they will require.  Manulife Bank argues that rationale, saying that if a home isn’t paid off some of the equity may be as a result of current high home prices and should the bubble burst and home prices tumble that equity may not look as rosy as it does today.