A local financial expert is cautioning consumers in the Fraser Valley against excessive borrowing in the wake of the Bank of Canada’s key interest rate cut last week.
David Yan, vice-president of wealth management at First West Credit Union’s Envision Financial division, said B.C. residents should regard the 25-basis point drop with caution, particularly when it comes to personal mortgages and lines of credit.
“With interest rates at historic rock-bottom lows, money is accessible and inexpensive to borrow, but that doesn’t mean the average Canadian should indiscriminately take on more debt,” Yan said.
“Eventually, interest rates will go back up. It’s not a question of ‘if’ but ‘when’,” he said. “A high debt load that might be serviceable now could lead to future pain.”
Beyond credit card debt, floating lines of credit can be particularly problematic if borrowers aren’t disciplined.
“With housing values in the Fraser Valley and Lower Mainland rising so dramatically in the last decade or so, lines of credit secured by the home value have also increased substantially,” he said. “People can become too comfortable increasing their debts using a line of credit, rather than focusing on paying them down. It happened last time there was a rate cut and is likely to be intensified by this one.”
Yan emphasizes the need for prudent financial planning.
“If there ever was a time to establish a long-term financial plan, this is it,” he said. “There’s uncertainty about whether the Canadian economy is in recession, about whether the housing market is inflated and there’s high household debt across Canada. I urge anyone who doesn’t have clear financial goals to set up a meeting with an expert who can help you establish a financial roadmap.”
Some of the country’s large banks have already introduced lending rate changes in response to the Bank of Canada’s announcement. Yan says his credit union will continue monitoring the markets carefully before making any decisions on how to adjust its lending rates.
“It’s a decision that every financial institution must make individually,” said Yan. “The important thing is ensuring our members and clients are well-equipped to make wise financial decisions for the long-term.”