While interest rates are expected to rise as the economic recovery gains strength, Canadian households aren’t likely to be upended by higher rates anytime soon, says National Bank Financial Inc. (NBF).
In a new report, the bank’s economists said that they don’t see rising rates undermining the critical support for the economy that’s expected to come from household spending.
“The success of the economic recovery will depend on Canadian consumers in the coming months. There are several reasons to be optimistic,” the report said.
To start, households enjoyed a record increase in both disposable income and the savings rate in 2020.
“Excess savings — which we currently peg at 8% of GDP — are currently hibernating in deposit accounts and are ready to be tapped by households once free of Covid-related restrictions,” the report said.
At the same time, household finances have also been given a boost by rising real estate prices and strong financial asset returns — producing the “strongest positive wealth effect since 2009,” the report noted.
This household financial strength has also been underpinned by rock-bottom interest rates. The report noted that recent data from Statistics Canada showed that the effective interest rate on mortgage debt dropped by 50 basis points over the past year.
While rates are ultimately expected to rise as the recovery becomes entrenched, NBF said that it doesn’t see rising debt service costs taking a bite out of household finances for the next couple of years.
“Despite the recent run-up in interest rates, it is important to keep in mind that mortgage loans maturing in 2021 have a contractual rate of 2.71% that is 60 basis points above the current market rate of 2.10% available for a 5-year mortgage,” the report said, adding that the rates on loans maturing in 2022 and 2023 are even higher.
“Despite our forecast of higher interest rates, we do not expect an interest-payment shock for current homeowners through 2024,” the report concluded.