Rising Interest Rates
The Bank of Canada has been increasing interest rates since March of 2022, which is causing financial institutions to increase their prime rate of interest, resulting in individuals and businesses paying more on their mortgages, loans, and credit cards under variable rates.
According to Statistics Canada, Canadians now owe $1.86 for every dollar of disposable income, so add to that the increasing rates of inflation and the increased interest rates, and many Canadians are becoming very concerned over their debt.
To understand how these changes may impact you directly, let’s look at a few examples of different types of debt you may be carrying:
If you have a fixed-rate mortgage, your interest rate is fixed-in until your mortgage comes up for renewal, and the rising interest rates won’t impact you until the term expires and you are able to renew.
If you have a variable rate mortgage, it means that at each increase, your lender will increase its own prime rate of interest. The impact to you is that more of your payment will go to interest rather than principal, causing your mortgage to be paid off slower than you had originally anticipated.
If you have a secured line of credit on your home, called a Home Equity Line of Credit or HELOC, your rate of interest and monthly payment will increase immediately.
Line of Credit
Unlike loans, lines of credit almost always have a variable rate of interest and generally a variable payment based on the interest rate.
Generally, credit cards have a fixed rate of interest, and your minimum payment is set by the number of purchases you make each month. The fixed interest rate may be more for certain transactions, such as cash advances.
Credit card interest rates do not fluctuate with the rise and fall of interest rates. The best way to avoid paying high interest on your credit cards is to pay your balance in full every month.
Fixed Term Loan
A fixed-term loan like a consolidation loan or car loan will generally have a fixed payment with a fixed interest rate determined at the start of the loan. However, suppose you have a variable rate loan. In that case, you can expect more of your payment to be applied to interest rather than the loan’s principal, resulting in your loan taking longer to pay off than you originally anticipated.
Here are some tips to reduce the cost of borrowing:
- How much do you owe? Write down each creditor you owe, the balance, interest rate and minimum payment. Note on each one whether it is a variable or fixed rate of interest.
- Total the minimum payments to determine the absolute minimum amount you need to pay each month.
- Make a list of which debts you wish to prioritize paying off. For example, you may want to pay off your variable loans first to avoid any future increases.
- Discuss with a mortgage professional the pros and cons of locking in your interest rate to a fixed amount or even doing an early renewal if that’s an option for you.
- Look at your budget to determine if you can comfortably afford to pay this and more without new spending. If you find that you cannot pay your unsecured debts (credit cards, lines of credit, pay day loans), in a reasonable period of time, or you cannot afford to pay more than the minimum balances without using them again, it may be time to talk to a Licensed Insolvency Trustee to find out what options are available to you to deal with your debt.