The Consequences of Rising Interest Rates

The pandemic triggered soaring inflation rates around the globe. While inflation is decreasing slowly from its peak of 9% in June 2022, it’s still high. Last year we saw inflation at a 30-year high, and as a result, interest rates have gone up.

Over the past year, the Bank of Canada increased its interest rate eight times, going from 0.25% in March 2022 to 4.5% in January 2023. When interest rates rise, the Bank of Canada charges banks more to borrow money. For the average consumer, this typically means that 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. Here are the many ways rising interest rates will affect your monthly bill payments, and what to do if you’re struggling to make ends meet.

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.

However, if your fixed-rate mortgage is up for renewal this year, you can expect to pay a significantly higher mortgage payment, as fixed rates have also gone up. Given that interest rates have already risen so much, and they could possibly stay at this rate, or even start to come down later this year, you’ll be faced with the decision whether to stick with a fixed interest rate or opt for a variable rate mortgage.

For those that have variable-rate mortgages, you’ve already seen your mortgage payments rise significantly. Hopefully you’ve been able to weather the storm, but if you’re now paying your expenses with credit to afford your new mortgage payment, that’s not a good sign.

If you’re currently facing mortgage payments you can’t afford, contact a credit counsellor immediately to discuss your options.

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. While it is ideal to pay down debt aggressively, it might not be possible right now. If costs have gone up and you’re struggling to pay all your bills, making the minimum payment may be necessary right now. It’s not ideal, but it’s more important to put a roof over your head and food on the table.

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 the 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.

If you do carry a credit card balance each month, or worse, multiple card balances, you should look into debt consolidation. A credit counsellor can help with this.

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.

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 or 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.


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