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Rising interest rates and debt – how you can stay in control

Posted on 21 June 2023

Written by Colin Boulton

The Bank of Canada has recently raised the interest rate to the highest it has been in 22 years. This is due to unexpectedly strong consumer spending and an uplift in housing activity. Although it might seem as though small increases in the interest rate will not have much of an impact on you, the cost can quickly add up – especially if you have a mortgage. Even a small increase can cost you hundreds or thousands of dollars over the year. The interest rate has now been hiked to a 22 year high of 4.75% and it looks as though more may be to come. What does this mean for you? Well, no matter how much interest rates rise, it will mean higher borrowing rates for Canadians. Rising interest rates will inevitably make loans and mortgages more expensive. For households already in debt, even a tiny increase in interest rate can have an overwhelming impact on their finances. So, what is the impact of rising interest rates? And how can you reduce the impact of rising interest rates? In this article, we explain the consequences and how you can stay in control.

What does the latest interest rate hike mean for your finances?

When the interest rate in Canada increases, so too do variable rates. This means that if you have a variable rate on a mortgage, a home equity line of credit (HELOC), a student loan, or line or credit, you will likely see an increase in your interest payment as a result. It is thought that a 0.25% increase in interest rate can increase the cost of a mortgage by an additional $12 per month per $100,000 borrowed. This can quickly add up, especially if it is applicable to multiple debts that you may owe. On a more positive note, changes in interest rate can affect the interest earned in high interest savings accounts and other investments.

How should you respond to the recent increase in interest rate?

There are a few things you can do to prepare for interest rate changes in Canada:

  • Stay up to date as best you can with interest rate news and updates
  • Consider what an increase in interest rate will mean for your finances. How much, for instance, will a 0.25% increase cost you each month?
  • Use a mortgage payment calculator if you have a variable rate mortgage to understand what your new payments will look like
  • Consider moving to a fixed rate mortgage
  • Speak to a Licensed Insolvency Trustee if you are worried about making the increased payments on your debt and would like to explore your options for debt relief

What does a small increase in interest rate cost the average Canadian?

You may initially think that a rising interest rate of just 0.25% will not have a lot of impact on your circumstances. This may not be the case if you have a mortgage. Say your mortgage is for $400,000 at a variable interest rate of 2.59%. This means that your monthly payments are $1,810 per month. A rising interest rate of 0.25% would make your new interest rate 2.84%. Your subsequent increased monthly payments would therefore be $1,860. Although an additional $50 might not sound like too much, this is an additional $600 per year for a small increase in interest rate. Many Canadians live paycheque to paycheque, so this additional cost can have an extremely negative impact on their finances. The mistake many people make is thinking that having an increase in interest rate from say 3% to a 4% is having an increase of just 1%. Yet should your mortgage payments increase from $300 to $400 comparatively, they would have increased by a third. As it turns out, small percentage increases can actually have a huge impact on our finances.

How do rising interest rates affect mortgages?

If you have a fixed rate mortgage, luckily for you, rising interest rates will have no effect on your mortgage until the fixed period ends and you need to renew. If, however, you have a variable rate mortgage, you will be impacted immediately by rising interest rates. Your mortgage lender will likely increase your borrowing rate, and you will pay more towards interest rather than the principal of your debt. This also means you will be paying more interest for the duration of your mortgage.

How do rising interest rates affect Home Equity Loans (HELOC) and lines of credit?

If you have an unsecured line of credit or a Home Equity Line of Credit (HELOC), rising interest rates will affect them. They will be impacted straight away with increased interest and higher monthly minimum payments. Unfortunately, lenders can adjust the interest rate on variable HELOCs and lines of credit immediately. It is worth checking the small print of your loan or line of credit, as this is often included as part of the agreement.

How do rising interest rates affect car loans?

Car loans and other ‘fixed term’ loans work differently to variable loans. Fixed term loans have set rules that include the interest rate for the duration of the loan. This means, therefore, that if you already have a car loan for say five years, your monthly payments will remain the same despite rising interest rates. Should you buy a new car or take out a new car loan, you could be buying during a period of rising interest and therefore have a higher rate.

How do rising interest rates affect student loans?

Effects on your student loan debt will very much depend on whether or not your student loan is on a fixed rate or a variable rate. You will not see any immediate impact on your monthly payments or interest costs if you have a fixed rate student loan, no matter whether it is a private loan or a government loan. If, however, you have a variable rate loan, you will experience the impact of the rising interest rate as well as a probable increase in your minimum payment.

How do rising interest rates affect credit card debt?

Most Canadians have a fixed rate when it comes to credit card debt, although in most instances it is usually a high interest rate of around 20%. If you have a fixed rate, you will not experience an immediate increase in interest rate on your credit card debt. If, however, your credit card debt is on a variable interest rate, you will likely see an automatic increase. To avoid this increase, try to pay off your credit card balance in full each month to avoid accruing interest.

How can you reduce the impact of rising interest rates?

There are a number of different actions you can take to try and counter the impact of rising interest rates. These include the following:

  • Get clarity on the debts you owe. You may want to list down all of the debts you have alongside the interest rate and type of loan, e.g. variable or fixed.
  • Pay off your debt wherever you can. The more you can pay off, the less interest you will need to pay overall. To pay off your debt faster, you may want to tackle the debts you have with the highest interest rates first.
  • Look to switch your variable debts into fixed rate debts. This will guarantee your interest rate no matter how much they fluctuate. It will also help you to better plan making your debt repayments.
  • Try to shorten the length of your loans or mortgage where possible. This can help you to speed up your payments and allow you to repay your mortgage sooner.
  • Try a debt consolidation loan. It is a good way of simplifying and condensing your debt into one monthly payment, and often has the advantage of decreasing or clearing your interest rate completely.
  • Speak to a Licensed Insolvency Trustee. As the only professionals in Canada legally able to file all forms of debt relief, they can help you to reset your financial situation if you are struggling with overwhelming debt. Options like a consumer proposal or filing bankruptcy may help you begin a fresh financial future.

If rising interest rates mean you are worried about making your monthly debt repayments or other financial obligations, it is important to tackle the situation immediately. With another increase in interest looking likely this year, acting fast means you can find a resolution to your finances no matter how bad you feel your circumstances are. A reputable Licensed Insolvency Trustee will review your situation and help you to make sense of it. At Spergel, we have been helping Canadians gain financial freedom for over thirty years, and we will find a form of debt relief for you too.

At Spergel, our Licensed Insolvency Trustees have the expertise and solutions to help you should rising interest rates affect your finances. Book a free consultation with one of our bankruptcy trustees to begin finding a solution for your situation. We are here to help, and will do whatever we can to ensure you meet your financial obligations. Reach out today – you owe it to yourself.

Colin Boulton

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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