For almost three years, Canadians have been warned that the current low interest rate environment can't last and that mortgage rates will soon begin to rise. It seems that they've been paying attention.

"Even without the catalyst of significant interest rate hikes, households have already pared back on their rate of borrowing," says a report by Craig Alexander and Diana Petramala at TD Economics. They say the growth of both housing-related debt like mortgages, and non-mortgage debt such as credit cards, personal loans and lines of credit, has slowed. However, they warn that personal finances of many Canadians "still appear stretched, implying that consumer spending will not be the engine of economic growth in the coming quarters."

On the non-mortgage side, lines of credit are the largest category of consumer debt, accounting for 41 per cent of outstanding debt in Canada, according to credit information company TransUnion. Thomas Higgins, vice-president at TransUnion, says it looks like Canadians are shifting to a more conservative and restrictive form of financing so they can better manage their debt loads.

The Canadian Association of Accredited Mortgage Professionals (CAAMP) says that "substantial shares of mortgage borrowers have voluntarily increased their regular payments and/or made lump sum payments. These payments reduce their amortization periods to less than the contracted periods. It means that if interest costs increase to unaffordable levels, the borrowers can often reduce their payments (within the limits imposed by the contracted amortization period)."

"Households are likely fatigued after borrowing and spending like gang busters over the last five to 10 years," says the TD report. "Indeed, the recent slowing pace of borrowing has come in lockstep with a marked deceleration in consumer spending on discretionary items and a soft landing in the Canadian housing market. The two go hand in hand. Fewer purchases require less debt, and the desire to accumulate less debt leads to less purchases."

Lenders have also been cautious. CAAMP says that the average gross debt service ratio for variable rate mortgages issued in 2010 was 19.6 per cent, "far below typical lender standards of 32 to 35 per cent" and that total debt service ratios averaged 28.9 per cent, "far below the 45 per cent standard."

CAAMP says it conducted simulations that assumed rates would rise to five per cent for all types and terms of mortgages. "The research concludes that the vast majority of these borrowers are positioned to afford payment increases that would result if interest rates rise to the five per cent assumed rate."

A survey conducted for CIBC says that 61 per cent of Canadians believe that interest rates will be higher a year from now. The TD report says that during the next year and a half, rates will probably reach the highest level in more than a decade. Although still low by historical standards, that could put some over-extended consumers at risk.

"In our opinion, many Canadians will experience a financial shock when interest rates eventually rise, but the vast majority of households should be able to cope so long as interest rates rise only gradually," says the TD report.

CAAMP's study asked current mortgage holders "the amount at which, if your mortgage payment increased this much, you would be concerned with your ability to make your payments." Forty-two per cent said they didn't know, but of those who answered, three to four per cent said they would be unable to afford any mortgage increase at all, while five per cent said they could pay $1 to $99 more per payment; eight per cent said they could afford $100 to $199, and 17 per cent said $200 to $299. Sixty-six per cent said they could afford $300 per payment or more.

CAAMP says its research shows that lenders and borrowers have been prudent, and that "risks appear to be very well-contained."

The association also says that most homeowners with mortgages have substantial amounts of equity in their homes – 69 per cent have 20 per cent or more equity. It says, "Most of those who might face unaffordable increases in mortgage costs could solve their problems by selling their properties."

The TD report says the slowdown in personal debt growth is "positive, but is only a start. The level of household debt remains excessive. The good news is that Canadians have responded to the calls for greater financial prudence."

Published: June 7, 2011

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .