While the United States economy has been improving since the global financial crash of 2008, Canada’s economy has remained steady by comparison. One of the effects of the market meltdown was that it caused both the Federal Reserve in the U.S. and the Bank of Canada to lower interest rates. Since both economies are closely linked, if the Federal Reserve moves toward rising interest rates due to the U.S. economic recovery, it can affect the Canadian economy even without a rate hike in Canada.
How Rising Interest Rates Affect You
Since our economy is growing slowly, investors have been buying U.S. currency more than Canadian currency, expecting to get a faster return on investment. The falling Canadian dollar has led to price inflation on imports, oil, gas and everyday items.
Mortgage rates in Canada are actually linked to the interest yields of bond prices. If the Federal Reserve reduces its purchases of bonds, it will trigger increases in long term mortgage rates. That means less money will go toward principal on your monthly mortgage payment. This domino effect could influence the way you save and spend money if you want to reduce your monthly payments when it comes time for mortgage renewal. You may decide to lock in a long term fixed mortgage rate instead of staying with a variable mortgage to avoid paying the higher interest rate on your mortgage payment.
Prepare for 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 all you can now to prepare yourself for potential increases. Do some calculations to see how a 1%, 2% or even a 3-4% increase in interest rates will impact your 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 professional counsellor for financial guidance, especially if you need to overcome debt.