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With the Bank of Canada raising interest rates on September 6, debt holders across the country are left wondering what it means for them. While the size of the increase – a quarter percent – may not seem significant, there are several reasons why people should be taking this move seriously.
The latest increase marks the second time in little more than two months that rates have gone up. As the effects of the July rate hike have yet to be fully realized, debt holders are poised to feel the weight of a half percent rise when heating and power bills spike in the fall. Not to mention, rates are expected to go up again as soon as October and potentially once more before the end of the year. That, in concert with the inevitable overspending that accompanies the upcoming holiday season, points to a significant wake-up call come January. Even households who feel comfortable now will soon feel the squeeze if they don’t take steps now to get their debt under control.
Canadian households are carrying more debt now than at any other point in history. The average non-mortgage consumer debt, including loans, lines of credit and credit cards, currently sits at over $22,000 per person. For every $1 of disposable income a Canadian earns, they owe $1.68 to various creditors. This leaves frighteningly little money left over for anyone hoping to get ahead. As the debt to income gap will only widen as interest costs continue to rise, the situation could quickly become unmanageable.
Upwards of half of all Canadians already report being within $200 per month of not being able to pay their bills. This could prove to be the tipping point that pushes many over the edge into an insolvency situation. For example, a homeowner with a $500,000 mortgage and an interest rate of 2% would expect to pay an additional $123 per month if their rate jumped to 2.5% with the latest increases – potentially cutting a household’s breathing room in half. Similar considerations would need to be made for lines of credit, loans or credit cards also making use of variable rates.
Now is a pivotal time for debtholders across the country. People will want to take a critical review of their budgets to determine where they currently sit and what the impacts of rising interest rates will be. Most will want to reconsider certain big-ticket purchases such as new cars or appliances and focus on saving instead. They should also be looking at what can be cut and – if possible – what can be re-directed to paying down the principal value of their debts. Finally, for those who opted for variable interest rates, hoping to take advantage of seven years of near historically low offerings, it may be time to lock in while they are still near the bottom of what looks to be a steep upward climb.
If you’ve followed the above steps and still worry how you’re going to keep up with the shifting tide, it may be time to sit down with a professional to review your options.
An original article discussing the recent interest rate increase and concern amongst Canadians was published
http://www.chroniclejournal.com/news/local/some-over-extended-with-debt/article_30c1d922-944e-11e7-b3ec-8f1287202524.html online on September 8, 2017.
Based out of Thunder Bay,
Tanya Reynolds is a Licensed Insolvency Trustee and Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 807.625.4840.
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