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(Kris Hanke/Kris Hanke/iStockphoto)
(Kris Hanke/Kris Hanke/iStockphoto)

Economy Lab

Financial literacy: Test your knowledge Add to ...

Frances Woolley is a professor of economics at Carleton University

In the late 1960s, Jeff and Ann signed a 25-year fixed-rate mortgage. It was a huge gamble. The interest rate they agreed to pay for the next quarter century, 8 per cent, was high by 1950s or 1960s standards. Just over ten years later, interest rates had doubled, and they knew they had done the right thing.

Others, who signed mortgages in the late 1970s at 10 per cent, and renewed those five years later at punishing terms, did not fare so well.

The Bank of Canada knows how low interest rates are by historical standards. This is the Bank's polite way of saying you'll be in serious trouble if interest rates rise: "The proportion of households with stretched financial positions that leave them vulnerable to an adverse shock has grown significantly in recent years, as the growth rate of debt has outpaced that of disposable income."

But what are people supposed to do? Incomes are stagnant, house prices are high. People take on debt to provide homes and an adequate standard of living for themselves and their families. This is the Bank's polite way of saying you're on your own: "When taking on debt, households bear ultimate responsibility for ensuring that they will be able to service that debt in the future."

Responsibility is a good idea in principle. Yet good choices require good information, and what will happen to interest rates over the next 25 years is anyone's guess. Moreover, people's numerical abilities are often weak, so they do not know just how vulnerable they are.

If you've chosen to read this column instead of watching funny animal videos on youtube, you're probably more financially literate than the average Canadian. Click on the attached test to see how well you can predict the impact of interest rate changes.

I determined my calculations using CMHC's on-line mortgage payment calculator. If you answer all three questions correctly: congratulations. Unfortunately, I cannot tell you how much smarter you are than the average Canadian, because I do not know of any financial literacy test that asks these kinds of questions.

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