A Large Majority of Canadians Would Struggle to Pay More in Interest Payments on Their Debt
The Bank of Canada raised its key lending interest rate from 0.5 percent to 0.75 percent. This is the first increase in the rate since September 2010. The increase will likely mean that average Canadians will pay more on loans such as variable-rate mortgages and lines of credit.
Canadian banks tend to increase the rates they charge consumers for different financial products when the Bank of Canada’s key interest rate increases.
Rising interest rates could be difficult for many Canadians to afford. In fact, a nationwide Ipsos poll showed that 77 percent of those surveyed would struggle to afford an additional $130 per month in increased interest payments.
How The Canadian Interest Rate Increase Affects Mortgages
Perhaps those most affected by an interest rate increase would be homeowners with variable-rate mortgages. Depending on how much you owe on your home, even a small increase could add up to quite a large amount of money owed each month.
Lenders usually increase their rates within hours of the Bank of Canada announcing an increase. This means that you will be affected immediately if you have a variable-rate mortgage.
If you have a fixed-rate mortgage, your rate will not increase right away. However, when it’s time to renew your mortgage, you’ll likely see an increase.
What Interest Rate Increases Mean for Home Equity Lines of Credit (HELOCs)
A home equity line of credit allows a homeowner to borrow money against the equity in their home. These loans are usually slightly more expensive than mortgages.
Most HELOCs are variable-rate loans, so cost of repaying them will go up with this latest interest rate increase.
Many Canadians have seen their homes increase in value significantly in recent years, and a lot of people have taken advantage of this fact to borrow against their home.
There is also the risk that rising interest rates could cause home prices to decrease, at least in some areas of the country, which could lead to some people owing a lot of money on a home that isn’t worth as much as it once was.
The Canadian Interest Rate Increase and Lines of Credit
Interest rates on lines of credit will most likely rise along with the Bank of Canada’s increase. This will mean that Canadians will be expected to pay back more money on their lines of credit.
Since many Canadians are already carrying high levels of debt, any increase in costs could be difficult to handle.
What Canadians Can Do
If you have a variable-rate mortgage, HELOC, or line of credit, you’ll want to immediately take the time to consider how this increase will affect you. While the exact cost of an interest rate increase may not be known right away, it’s pretty safe to assume that this rate increase will be passed on to consumers. This means that you’ll be expected to repay more money each month.
In addition, many economists believe that this interest rate increase could be the first of several, and that increases will likely continue into 2018.
It’s always good advice to not borrow more than you can afford to repay and to pay down your loans as quickly as is possible. However, with borrowing costs increasing, this becomes more important. Carrying a large amount of debt is the “new normal” for many Canadians and many people live paycheque-to-paycheque, with little room in their budgets. Now that rates have increased, nearly everyone will need to look for ways to cut costs in order to afford their debts.
If you are having trouble repaying your debts, or if the recent interest rate increase will make it very difficult to afford your debt, it’s a good idea to speak with a financial professional. A Licensed Insolvency Trustee can speak with you, review your situation, and provide you with details on the options that are available to you.
Each financial situation is different, so different options will be available to different people. A Licensed Insolvency Trustee will provide you with details on all options, not just those that the Trustee can administer. Most Trustees will offer an initial consultation at no cost, so that you can find out information on the available options.