Interest Rates

Preparing for Higher Interest Rates When You Are in Debt

Canadians are preparing for higher interest rates. Are you doing everything you can to get ready, too? Big rate hikes are coming for consumers in Canada.

In fact, they’re already beginning to appear. The Bank of Canada has been hiking the benchmark interest rate after keeping it at historic lows for several years.

In just one year, the bank rate more than doubled and continues to rise1. In the past year alone, rates have gained half a percentage point and now stand at 1.75 percent2.

As these rates rise, consumers will immediately feel the impact.

The benchmark rate sets the trend for a number of different interest rates that affect Canadian borrowers and savers, including:

  • Bank Accounts. The interest you get on your savings is directly tied to the benchmark rate set by the Bank of Canada.
  • Mortgages. The interest you pay on your home mortgage is linked to the benchmark rate.
  • HELOCs. As rates go up, Canadians will pay more interest for their HELOCs (Home Equity Line of Credit).
  • Renewals. The interest you’ll pay on any debt renewal package will also rise as benchmark rates go up.

How to Start Preparing for Higher Interest Rates

Sadly, the impact of rate hikes will be felt the most by individuals who are in debt. If you’re one of these individuals, getting ready for these hikes will be even more crucial for survival.

Because of your debt, your budget may be tighter and you may have expenses linked to prevailing interest rates. For these reasons, you should take extra steps to be prepared.

Here are five areas where you can take action and start preparing for higher interest rates now.

1. Your Budget

The first thing to do when analyzing your expenses and debt payments is to create a budget. Write down your anticipated income as well as all of your major expenses. Include things that are expensive but which you are still planning to do. For example, if you are thinking of going on a vacation or buying a new car, make sure you include those plans on your budget.

Use your credit card records and taxes as a guide for your income and expenditures. That way you can be a little more realistic. After you have itemized everything, you will know your approximate cash flow and how much leeway you have for paying down that debt.

2. Floating Rate Mortgages

If you have a floating rate mortgage on your home, then you should certainly be prepared to pay more on your monthly mortgage expense.

For example, take a look at how much of a difference just one percentage point will make. Let’s say you have a mortgage with a $300,000 balance and 15 years remaining.

  • With a three percent interest rate, your monthly payments will be $2,072.
  • However, at a four percent interest rate, your monthly payment will be $2,219.
  • Added costs: That’s equal to a $1,764 increase in costs annually.

3. Renewals

If you are considering renewing a mortgage or other types of debt, now is the time to do so. As rates are rising, a renewal will make less and less sense. In fact, in the future, renewals may end up making your costs go up. To prevent them from going up even further now is the best time to get your renewal process underway.

4. Your HELOC

Some people are considering a Home Equity Line of Credit (HELOC) to supplement their finances. Or sometimes it’s used for an investment in a new property. It that’s you, then now may be the time to take this option.

This is especially true if you can lock in a rate that will not float with the market. That way you can make an arbitrage on the old rates versus the future higher rates.

As an example, if you have equity in your home, you could get a HELOC loan. Let’s say your HELOC loan carries a 3.5 percent interest rate. If you take those funds and invest them in something that yields more than 3.5 percent, you can come out ahead. So, a $200,000 HELOC loan at 3.5 percent that’s invested in something that yields 5 percent will result in a $3,000 gain per year.

The idea here is to lock in a lower rate on your own loan while interest rates are still rising for other types of loans. Simply investing in more real estate at the (lower) fixed rate will help you take advantage of the lower rates.

If you’re unsure about how this works, a financial advisor can help explain how it works.

5. Your Job & Other Income Streams

For all of these options, it is important that you get your financial profile in order first. If you are thinking of changing jobs, do the renewal or HELOC beforehand. Otherwise, the application will be more difficult due to the uncertainty of a new position.

Similarly, you should make sure to pay down credit card debt or student loan debt before any major loan application. Once this is done, your financial profile will be much cleaner, and you will have a better chance of locking in the low rate before interest rates go up.

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Summary

As rates rise, people with mortgages or other debt should be aware of the steps they need to take to be adequately prepared:

  1. Step One. It’s important to understand your entire financial picture, which helps when creating a clear budget.
  2. Step Two. Secondly, you need to take advantage of debt that is available in today’s market at low rates. Whether it is HELOCs, Floating Rate Mortgages, renewals or any other debt, it’s essential to act now. That way, you’ll lock in low rates before they rise based on the Bank of Canada’s forecast.
  3. Step Three. Lastly, make sure all of your income streams are stable and consistent over time. Strive to lower high-interest revolving debt and maintain a healthy credit picture.

Preparing for higher interest rates isn’t as complicated as you might think. Knowing that you can make a difference by taking these steps is crucial. It means you’re doing everything you can to keep your world safe and pave the way for a brighter financial future.

To get started, call us. We can help with a free, no-obligation financial consultation. You’ll meet with a Licensed Insolvency Trustee who can help put you on the path to that brighter future today.


1https://www.bankofcanada.ca/rates/interest-rates/canadian-interest-rates/?lookupPage=lookup_canadian_interest.php&startRange=2009-04-06&dFrom=&dTo=&rangeType=range&rangeValue=1&rangeWeeklyValue=1&rangeMonthlyValue=60&series%5B%5D=V122530&ByDate_frequency=daily&submit_button=Submit

2https://ca.finance.yahoo.com/news/bank-canada-stands-pat-benchmark-interest-rate-150027770.html