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The Consequences of Rising Interest Rates

The Covid-19 pandemic has triggered soaring inflation rates around the globe. According to Statistics Canada, the 4.7 per cent rate is the highest it’s been since February 2003. When inflation rises, typically interest rates go up, and there has been talk that rates will likely rise in 2022.

When interest rates rise, it means the Bank of Canada is charging banks more to borrow money. For the average consumer, this means many will be rewarded through interest payments in their savings account, but it will become more expensive to take out a loan, and existing loan payments may go up.

While Canadians have benefitted from low borrowing rates for many years, those who borrowed beyond their means may find themselves in hot water.

How you may be affected

  • Mortgage: The impact on your mortgage will depend on whether you have a fixed or variable-rate mortgage. For those with a fixed-rate mortgage, you will not see any impact until you renew your mortgage term. This is because you locked in at an agreed-upon rate in order to pay the same amount every time. For those that have variable-rate mortgages, be prepared for your monthly mortgage payment to increase. While this may seem like a blow, you were likely paying a lot less than those locked into fixed-rate mortgages.
  • Loans: If you have any secured loans, such as a home equity line of credit, you will see an increase in your monthly payments. This is because secured loans are tied to the Bank of Canada’s prime rate. If you have unsecured loans with a fixed interest rate, you should not see any impact on your payments.
  • Credit cards: Your credit card interest rate is not tied to the Bank of Canada prime rate, so there should not be any increase in minimum monthly payments. That being said, with mortgage and loan costs rising alongside cost of living, it’s best to ensure your credit card is paid in full every month so that you are not carrying a balance. Credit card debt can quickly spiral out of control if you’re not careful.
  • Savings accounts: The one silver lining about a rise in interest rates is that your savings account will increase because the interest paid out will be higher. That being said, interest paid on basic savings accounts is typically quite low, and while you may see an increase, it won’t exactly make you rich.

How to prepare for interest rate hikes

One of the best strategies during periods of rising interest rates is to pay yourself first while maintaining your monthly budget. Do not panic if your living expenses increase, and stay focused on your financial goals while avoiding debt.

If you find yourself already in debt, do what you can now to prepare yourself for potential increases. Do some calculations to see how a 1%, 2% or even a 3 to 4% interest rate hike will impact your current monthly payments. Will you still be able to afford a higher payment on your mortgage, car loan, or other personal loan if your income stays the same?

If you don’t think you will be able to handle an increase in interest rates, you do have options. Budgeting, debt consolidation, increasing your income and saving an emergency fund are all avenues to explore. It’s a good idea to consult a credit counsellor for financial guidance, especially if you need to overcome debt. Contact SolveYourDebts.com today for a free consultation.

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