Friday, November 2nd, 2018
When interest rates are on the rise, some or all of your debt gets more expensive. And that can mean less money in your pocket.
Right now, Canadians owe around $1.71 for every dollar we bring in. To put that into perspective, we only owed around 66 cents for each dollar in the 1980s. Why? Interest rates were at an all-time high then. The incentive was to save and not take on debt by doing things like renovating your kitchen.
Even in a low rate environment, with interest on debt being cheap, money was tight for many people, with over 50% saying they're $200 or less from not being able to pay the bills. A new release is reporting that a third of Canadians feared bankruptcy even before the recent rate hike.
If you have a line of credit or variable rate mortgage, you feel the pinch as soon as interest rates go up.
Shannon Lee Simmons, Certified Financial Planner and founder of the New School of Finance, says that rising interest rates may hit younger folks and families the most, especially those with floating-rate student loans.
"Young people may be living on a tight budget to begin with, even an extra $50 a month in interest matters. The best thing to do if you have floating-rate debt is to try to find a way to pay it down so that future rate hikes don't impact you as much."
According to Ratehub.ca, if a person had a variable rate mortgage balance of $400,000 since July 2017, as of October 2018, they would have seen their monthly mortgage payments increase by $205 over the previous 15 months. Further rate hikes of 0.25% could increase monthly mortgage payments by $53, to a total of $258.
If you'd like to know the impact of an interest rate hike on your own debt, check out the calculator at the end of this CBC article.
Money Moves to Consider
If you need the help of a pro, you can also reach out to a non-profit credit counsellor or Certified Financial Planner.