By now you’ve certainly heard about the impact the recent Bank of Canada (BoC) interest rate hikes can have on anyone with mortgage debt and monthly payments. Last week the BoC raised its benchmark interest rate for the 5th time this year, to a high of 3.25%, and additional rate hikes are anticipated before 2022 ends.
But what about the more than 60% of Canadians who have no mortgages to pay? Are they affected by these rate hikes as well?
Who is impacted by the interest rate hike?
We are all affected by Bank of Canada interest rate hikes, whether we hold a mortgage or not. That’s because most of us are holding some sort of debt right now, whether it’s a car loan, line of credit, student loan, payday loan, or just a regular credit card. A combination of interest rate hikes, a rise in the rate of inflation (goods and services start costing us more) without a matching rise in our annual incomes, and the burden of existing credit card, mortgage, and loan debt, can result in financial pain for all of us.
Your loans will cost more
Let’s take a look at a few examples: You decide your aging vehicle is starting to cost more to repair than to keep and decide to visit your local dealership to buy a new one.
Whether new or slightly used, that vehicle is now going to cost you more due to those Bank of Canada interest rate hikes than it might have a year or two ago. Instead, depending on your credit score and financial history, you could be paying an interest rate of (on average) 3% to 8% or higher on the new vehicle.
Here’s one more example: Let’s say you have a modest line of credit with your favourite bank and have been using it to transfer higher-interest credit card debt to the lower-interest account. Recently you’ve noticed your once-affordable line of credit has started to cost you more.
What was once a 5% or 6% interest rate has now jumped to 10% or 11%, with further potential increases in sight. Most lines of credit are variable, which means the cost of interest rises as the Bank of Canada’s interest rate rises. Ouch!
Other areas where you will see the direct impact of interest rate hikes include a rise in the cost of vehicle insurance and the further increase in prices for consumer goods, restaurant food, and groceries as businesses struggle to stay afloat while borrowing money to operate.
Your investments will be impacted
The Bank of Canada’s interest rate hikes have also impacted the average Canadian’s investments in a significant way, with many dropping in value over the past eight months. Anyone hoping to convert their Registered Retirement Savings Plan (RRSP) to a Retirement Income Fund (RIF) in post-work years, or cash out investment accounts to cover rising debt costs, may be shocked by the drop in their value.
One area where higher interest rates could help the average Canadian is the area of Tax-Free Savings Accounts (TFSAs) and traditional savings plans. Interest paid on those accounts has been terrible for more than a decade but is now starting to creep up to 2% to 4%, depending on the length of time your money is locked in (and the company offering the account). But compared to the increasingly higher costs of inflation and opposing rise in interest rates, the financial gains from these savings accounts won’t totally ease the pain of our immediate debt worries.
Rising debt means rising insolvencies
Statistics Canada has estimated the amount the average Canadian owes, in relation to their income level, increased to 181.7% over the past two quarters. That means we carry a debt of nearly twice what we earn. That’s scary. This increase also impacted the insolvency rate, with the Office of the Superintendent of Bankruptcy reporting a 19.1% increase in consumer proposal and personal bankruptcy filings as of July 2022, (compared to the same period last year).
What Canadians Can Do to Ease the Pressure
If you have a variable-rate mortgage, Home Equity Line of Credit (HELOC), or an unsecured line of credit, you’ll want to take the time to consider how the Bank of Canada interest rate increase could affect you.
It’s always recommended to try not to borrow more than you can afford to repay and make every effort to pay down your loans as quickly as possible. However, with borrowing costs increasing, this becomes even more important.
Nearly all of us will need to look for ways to cut costs to manage our debt and the rest of our expenses each month.
If you’re feeling the pinch of inflation (and the resulting increase in grocery and gas costs), your income isn’t keeping up with your expenses, and higher borrowing costs due to interest rate hikes are making things even worse, consider speaking with a Farber Debt Solutions team member today. Just click to arrange a free consultation at a time and date that is convenient for you. We’re here to listen – and to help.