Carney warns consumers about debt

Bank of Canada governor Mark Carney. REUTERS/Edgard Garrido

Bank of Canada governor Mark Carney. REUTERS/Edgard Garrido

Mark Dunn, Senior National Reporter

, Last Updated: 3:34 PM ET

OTTAWA - Mark Carney offered some advice to Canadians on Wednesday - be careful about borrowing because the days of bargain-basement interest rates are coming to an end.

"If you are borrowing, make sure that you can sustain that borrowing in a world of higher interest rates," the Bank of Canada governor said at a news conference, where he said the bank's benchmark overnight rate would remain at 1% for the time being.

Economists expect the rate to gradually rise by the end of the year - meaning it'll cost more for things like mortgages and lines of credits.

The rate has remained steady for almost two years as a stimulus to help shield Canada from the European debt crisis and the crippling effects of the 2008-09 financial collapse in the U.S.

Credit card interest rates are already spiking, as are bank fees.

While saying the economic outlook for Canada is promising, with growth forecast at 2.4% this year, the distorted price for oil in North America compared to the rest of the world "could dampen" projections, Carney said.

Consumers are already seeing prices surge at the pumps.

But the biggest risk facing the Canadian economy is household debt.

Carney continues to be concerned about the amount Canadians are sitting on and the money homeowners are borrowing through home-equity loans to pay off other debts or buying cars and other items.

The amount of home equity extracted through home-equity lines of credit (HELOCs) and mortgage refinancing was $64 billion in 2010 - up from $8 billion in 2001, the bank said in its report.

While describing Canadians as prudent, Carney said those who may be spending beyond their means should be "careful about borrowing on the assumption that rates are going to stay low for the lifetime of what you've borrowed."

Consumers should not assume that the value of purchases is going to rise, he said.

"That's not a wise set of assumptions to make and be very careful about borrowing on the assumption that what you're buying - if you're buying a house or whatever - that its price is going to continue to go up."

There is much concern in Canada about a housing bubble - similar to what many Americans experienced when they mortgaged over-inflated house prices only to see the value of the property plummet to less than the purchase price.

In January, Canadians owed $1.596 trillion on everything from mortgages to credit cards to lines of credit, the bank said.