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Russell Wangersky: Best get your financial house in order

Bank of Canada. (File photo)
Bank of Canada. (File photo)

You hear it in the distance, like the rumble of thunder when you really, really don’t want rain.

But thunderstorms aren’t always big, and you can hope that its track is moving in a different direction, that it will miss you, that it’s all sound, but no fury.

This week, there are rumblings on the financial markets that suggest a different sort of storm is coming, though it didn’t arrive this week.

It’s got to do with interest rates and debt — and some of us are carrying a truly remarkable amount of the latter.

A realty lawyer I know told me about his frustration dealing with homebuyers intent on buying the biggest house they can get, regardless of what they can afford. “You ask them how much they put aside every month for emergencies, and all you get back is a blank stare.”

Easy capital has meant many of us have gotten a little bit — or a lot — flabby in the finance department. It’s not only individual Canadians — provincial and federal governments have gone on the train, too, comfortable in running up big deficits because interest rates aren’t in the same range they were that last time the feds and the provinces put the brakes on and decided they had to bring down long-term debt that was eating up more and more revenue every year.

Since 2009, the Bank of Canada rate has been at or below one per cent — that’s an eternity of cheap money. It continued that position on Wednesday, holding the rate steady because lower food prices in most parts of the country helped hold down inflation rates.

The biggest group at risk, if the Bank of Canada should change its plans? Probably millennials, who owe more money than previous generations, with 29 per cent of that group saddled with more than a quarter of a million dollars in debt and already having to get used to the new world of precarious employment.

We’ve been lucky that cheap credit has lasted this long. It can’t go on forever.

The question now is how the eventual change in rates will affect things like home ownership, especially in the wildly different situations between, say, overheated realty markets in Toronto and a distinctly dissimilar problem in rural parts of Atlantic Canada.

One thing is for sure: according to a survey by Manulife Bank this week, 52 per cent of Canadians say they don’t have the financial room to handle an increase in interest rates. And that’s happening even as the average amount of mortgage debt held across the country rose by a whopping 11 per cent in a single year to more than $200,000.

The ugly part is that the possible fallout could hit the thrifty and the spendthrifts at the same time; those with no room to pay additional costs would have to sell and lower prices, and lower house prices would reduce the equity held by those who played everything a little bit more safely.

I guess I’m skittish because I remember what it was like to have a mortgage where I was paying 11 per cent interest. I’m not suggesting that kind of rate hike is about to return — far from it. And maybe I’m just being like one set of my grandparents — nervous after living through bank failures, they felt safer hiding money all over their house to avoid a complete bank collapse that never came.

Cheap loans can’t last forever.

The smarter ones among us will be ready for that — or at least, will leave some cushion in our monthly accounts to absorb what has to happen.

Storms always come. You can plan for that — you just can’t always plan on when they’ll arrive.

Russell Wangersky’s column appears in 30 SaltWire newspapers and websites in Atlantic Canada. He can be reached at rwanger@thetelegram.com — Twitter: @wangersky.

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