Interest rates are rising - how will you keep up?

2022-11-09  3 minute read

David Gowling

Debt Solutions

Canadians are grappling with the effects of an overheated economy due to an increase in inflation, labour shortages, higher interest rates, and other variables. To manage the effects of inflation, the Bank of Canada (BoC) has hiked interest rates multiple times in 2022. It was only two years ago when the BoC dropped interest rates to 0.25 percent to ease the economy from the effects of the COVID-19 pandemic.

couple paying bills together

According to a recent announcement, the rates are now at 3.75 percent. This, in turn, has caused prime lending rates at Canada’s major banks to rise to 5.95 percent. What does this increase in prime lending rates mean for you?

Credit card debt

Many credit cards already charge a high interest rate of 20 to 25 percent. Typically, the rates do not change on account of announcements made by the BoC. When the prime lending rate decreased during the pandemic, credit card interest rates stayed the same. However, with the recent increases, many credit cards rates have gone up by 1 percent or more. For the most part, these changes in interest rates do not have a significant impact on the average person. If you can pay off your credit card balance each month, then you don’t have to worry about interest rates.

However, these increases are now becoming causes for concern as the cost of necessities such as groceries, gas, clothing, and electronics also continue to rise. As your daily living costs increase, it may mean using credit cards to pay for monthly expenses combined with the inability to pay off the balance each month.

Mortgages

The increase in the BoC interest rates and banks’ prime lending rates can have the biggest impact on mortgages. However, the true impact of the increases may be delayed. Many people have fixed rate mortgages that will not mature for one to five years. Once those mortgages reach their renewal time, there will be significant changes in the interest and potentially in the monthly payment. 

If you have variable rate mortgages, the payments will only change once certain milestones are reached with the interest portion of the payment. Even if you are one of the lucky ones with a variable rate mortgage but no change in your payments (yet), a bigger portion of your monthly payment is going to cover the cost of interest and less towards the principal.

Strategies to manage rising mortgage costs:

  1. If the monthly cost is the higher priority, consider increasing the amortization of the mortgage. It can help reduce the payment, but you need to be aware it means you will be paying more interest over the long term and will take longer to pay off the mortgage
  2. If you are currently paying your mortgage once per month, consider making more frequent payments such as weekly or bi-weekly. This is recommended if it matches with your salary schedule.
  3. If the concern is your ability to handle any further rate increases, consider a fixed rate mortgage upon renewal. The rate may be higher, but you would be certain of the amount you have to pay over a long term.

Car loans

It seems to be enough of a problem trying to find a new car to replace your old one due to supply chain issues. The demand for cars far outweighs supply and car dealers are charging higher costs for new cars. The cost of financing a vehicle has also increased substantially thus making it double jeopardy. Car loans that used to be financed at two to three percent are now being financed at six to seven percent causing a significant increase in the monthly payment.

Strategies to cope with rising car prices

  1. Replace your car only when you absolutely need to.
  2. If you decide to change your car, consider buying a new one instead of a used one. Most new cars have warranties which should help keep the repair costs down for the first few years.
  3. Lease rather than finance the car. If your normal driving route amounts to low kilometers, leasing may help keep the monthly cost down. However, it will mean you will return the car with no equity at the end of the lease. You will also need to start over with your next car.

Avoid payday loans

Just like many others, you may be experiencing a monthly scarcity in funds considering your income has stayed the same yet there is a consistent rise in living costs. Some will turn to payday loans with the mindset that it will only be a temporary need. However, the financing costs of payday loans can reach 50+ percent. Often, you will need another payday loan to refinance the old loan thus creating a cycle with no escape.

Get back on track

If you find yourself falling further and further behind, contact the financial experts at MNP. Our Licensed Insolvency Trustees can evaluate your options with a free confidential consultation to help you get back on the right track. For example, a consumer proposal can help balance your monthly payments and reduce your debt to an amount that is manageable. You will receive a recommendation depending on the specificities of your debt situation.