Most Canadians will not be able to handle an increase in interest rates

70 percent of mortgage holders in Canada do not have the financial means to handle a mere 10 percent rise in monthly mortgage payments, according to a Manulife Bank survey of roughly 2100 Canadian homeowners conducted earlier this year. A quarter of those surveyed said they have fallen short on paying their bills in the last 12 months and half say they have $5000 or less in emergency funds.

38 percent of Canadians surveyed by Manulife say that they could handle a rise in mortgage payments of between one to five percent. 20 percent will have the financial means to absorb a six to 10 percent increase in payments, but 14 percent say that they won’t be able to handle any kind of increase whatsoever.

The Manulife survey paints a troubling picture of Canada’s household debt situation, currently the highest amongst G7 countries. For every one dollar that an average Canadian earns, he or she owes $1.67. That in itself is problematic, but what makes Canadians particularly vulnerable to financial hardship is the looming prospect of a rise in interest rates.

As the economy improves (which is has, in the last year or so), the Bank of Canada inches closer and closer to raising interest rates. Commercial banks will follow suit, and we’ll start to see our mortgage rates rise, increasing monthly mortgage payments.

“The truth about debt in Canada is that many homeowners are not prepared to adjust to rising interest rates, unforeseen expenses or interruption in their income,” said Rick Lunny, President and CEO of Manulife Bank of Canada in a statement today.

Millennial homeowners are particularly vulnerable to a rise in interest rates and don’t seem to have sufficient savings to cover bills in the event of an emergency or if the primary earner loses his or her job.

Over the last seven years, it is millennials that have seen their mortgage debt rise more than any other generation. This is partially due to the fact that more than 45 percent of millennials received help from their parents to purchase a home, pushing them into the housing market when they might have not been financially ready to own a property.

Another interesting tidbit — 44 percent of millennials learned “a little” or nothing about debt management from their parents. This was the group that was also mostly likely to have been late on their mortgage payments in the past 12 months.

Despite the indisputable fact that Canadians are in over their heads in debt, the rate of mortgage defaults in Canada still remains low. According to data from the Canadian Banker’s Association, as of February 2017, only 0.28 percent of mortgages were in arrears.

Low interest rates have fueled the ability of Canadians’ to obtain massive amounts of debt — mortgage rates in this country are still extremely low, making it relatively easy to meet monthly mortgage payments despite no significant rise in wages across the board.

The results of the Manulife survey certainly lends credence to the possibility that many Canadians may have been allowed by lenders to take on too much mortgage debt, leaving little room for savings. Although the big Canadian banks have continued to stand by their vetting process in determining who qualifies for a mortgage, the recent Home Capital Group scandal has prompted many to question just how robust our mortgage industry is, especially in the inevitable event of an interest rate hike.

Follow Vanmala on Twitter