JASON HEATH | Special to the Financial Post  | Published June 21, 2012

A report by Statistics Canada this week helped highlight the Catch 22 that consumers might find themselves in when interest rates rise to more normalized levels. In particular, when interest costs begin to increase, will people spend less or stop saving?

The average Canadian household spent $70,574 in 2010, according to StatsCan’s survey of household spending. About 75% of this ($53,016) was on goods and services, with the remaining 25% ($17,558) on gifts, insurance premiums, income taxes and pension contributions.

Given that the average Canadian household’s debt currently stands at $112,329 according to BMO’s survey on household debt, a three percentage point rise in the prime rate from the current 3% would cause a big drag on the average Canadian’s budget.

Keep in mind, prime was 6.25% just five years ago. Higher interest costs for the average Canadian household based on a three percentage point rise would equate to $3,370 a year. That’s a 5% rise in expenses for the average household. For some it could be 10%. For some it could be more. read full article