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The plan to baby the country’s borrowers has a flaw.

The Bank of Canada wants to be gentle in raising interest rates to minimize the jolt to heavily indebted households and the economy, but it doesn’t directly control the full range of borrowing costs. Fixed rate mortgages, the kind most people have, take their cue from a bond market that cares nothing about the difficulties some families might have if rates climb.

Rising rates in the bond market are a reason why the big banks recently increased rates on their posted five-year fixed rate mortgages by as much as 0.45 of a percentage point, which is a lot in one go. Barring an almost unimaginable surge in inflation, the Bank of Canada wouldn’t do that to borrowers. In fact, some economists see the central bank increasing its benchmark rate just once in the remainder of 2018, by 0.25 of a percentage point.

Higher posted mortgage rates have only a limited impact on the discounted rates people pay after negotiations with their bank or if they use a mortgage broker. But they’re still noteworthy because they’re used in the stress testing of home buyers to see whether they can afford a mortgage at higher rates than we have today.

Posted bank mortgage rates are thrown into a blender that produces a five-year benchmark rate for use in stress tests. This rate was tabulated by the Bank of Canada at 5.14 per cent as of Wednesday, but could move higher as a result of recent posted rate increases by the banks.

The Bank of Canada looks at a lot of factors besides household debt in setting rates. But the bank’s Governor, Stephen Poloz, devoted an entire speech earlier this week to talking about how debt fits into the central bank’s thinking. He said the economy will need higher interest rates over time to keep inflation on track, but maybe not to the extent we saw in previous periods of rising rates. The reason: Indebted households might not need much of a smack with the hammer of higher rates.

The central bank has since last summer made three separate increases of 0.25 per cent in its overnight rate, which influences variable-rate mortgages, lines of credit and floating-rate loans. This exemplifies Mr. Poloz’s gentle approach to rate increases.

The bond market reflects what investors are thinking about the economy, not what the country needs to thrive. With concern about inflation rising, rates in the bond market have increased enough in the past year that discounted five-year, fixed-rate mortgage rates have recently hit 3.24 at various mortgage brokerage firms. According to, the discounted rate a year ago was 2.24 per cent.

If you bought a home at the March national average price of $491,065 with a 10 per cent down payment, the 12-month differential in five-year fixed rate mortgage payments would be $230 a month. For some families, that’s like paying for an extra week’s groceries every month.

Mr. Poloz himself makes a case that borrowers need to be at least as focused on rates in the bond market as they are on the Bank of Canada. He said in his speech that mortgages make up almost three quarters of the just more than $2-trillion owed by households in this country, and that just 25 per cent of mortgages have a variable rate. The other 75 per cent are subject to mortgage rates that are influenced by the bond market.

Plenty of people in all age groups are vulnerable to rising mortgage rates. Mr. Poloz said the latest numbers show that 90 per cent of homeowners under the age of 35 have a mortgage, up from 85 per cent in 1999. Among owners aged 55 to 64, the segment with a mortgage has jumped to 46 per cent from 34 per cent.

Homeowners are doubly exposed to rising rates if they have a mortgage and a big balance on their home equity line of credit, which allows people to borrow against the equity in their property.

There’s still time to adjust to higher rates, though. Make a mid-2018 project of figuring out how you’ll absorb higher debt payments. What can you trim to make room for higher payments? Where can you find money to pay down what you owe? For a bunch of reasons, paying down debt looks like a better bet than investing right now.

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