The Learning Centre:
Rising interest rates: what it could cost you (and what to do about it)
What goes up must come down. Well… until it goes back up again. We’re talking about interest rates of course!
What is the potential impact that rising interest rates have when it comes to the debt you carry? Well, let’s put it into perspective.
According to the Educators Financial Kickstart Challenge, 54% of education members have debt (other than a mortgage) they would like to get under control.
Now if rates were to rise by one percentage point over the next year (the Bank of Canada increased rates by a quarter of a percentage point on July 12, 2017), more than half of you may find it increasingly challenging to achieve that goal. That’s because according to a new RBC report, Canadian households would have to spend an additional two cents on debt repayments for every $1 of income.
While two cents may seem nominal, it adds up when you factor in Canada’s household median income, which as of July 2017 Statistics Canada currently has listed as $78,870 (which is within the ballpark of what you would be making if you’re well into your career and higher up on the pay grid).
That would mean an additional two cents would add up to roughly $130 more a month in debt repayments.
That’s an additional $1,560 a year simply towards servicing the interest on your debt (and that’s just on debt other than your mortgage).
True or false: a one-percentage point hike in the Bank of Canada interest rate would mean that the interest rate on your mortgage only goes up by 1%.
That would be false.
Let’s say you have a variable mortgage currently at a 3% interest rate. Since variable mortgage rates are generally set to the current level of interest rates, that 3% then becomes 4%—that’s an increase of 33%, not 1%.
So is it time to start taking an interest in interest rates?
That would be a yes. But don’t worry. There are steps you can take to avoid feeling the pinch (or worse) as rates are likely to continue to climb.
Start throwing extra money towards your debt while interest rates are still relatively low.
If this means downsizing your summer plans, so be it. The more money you can put towards paying off your debt before interest rates climb any further (and they most likely will)—the more of that money will go towards paying down the principal (and the less your cash flow will be impacted when those rates reach their peak).
Looking to free up cash flow so you can start paying off debt sooner? Here are 5 tips for saving up to $500 a month!
Consolidate multiple high-interest credit cards and debt into one low-rate line of credit.
If you’re making multiple debt repayments each month all at varying interest rates, you’re stretching your finances unnecessarily. A line of credit can streamline all that debt into one manageable monthly payment, freeing up cash flow so you can pay your debt off faster, saving you money in the long run. Something you’ll appreciate, particularly should interest rates continue to rise.
Consider increasing the frequency of your debt payments.
Besides the interest rate, the biggest detriment to any debt repayment is time. The longer it takes to pay off, the more that debt costs you. If you have a mortgage, simply switching from monthly payments to accelerated bi-weekly payments can severely cut down your amortization period and save you loads of money in interest over the duration of your mortgage. The same goes for credit cards and loans. Whether you choose to consolidate that debt or not, making payments twice a month versus once a month will mean you’re putting more money towards paying down the principal.
Renew your mortgage early before rates go up any further.
Is your mortgage coming up for renewal in the next year or two? If rising rates have you feeling a little anxious, you may want to sit down with one of our accredited mortgage professionals to discuss renewing early (so you can lock in at current rates).
Shop around for the best rate.
Whether interest rates are rising or not, shopping around for the best rate is something you should be doing regardless. Naturally, the higher your credit rating, the better your bargaining power will be during your rate search and negotiations. So be sure to always make at least the minimum payment by the due date each month to keep your rating in excellent standing.
Get an educator-specific opinion.
Whether you’re shopping around for your first mortgage, are looking to renew/refinance your existing one, or wanting to consolidate multiple high-interest credit cards and loans before interest rates climb any higher—reach out to Educators Financial Group. Because no matter where you are on the pay grid or what your pension income is in retirement, we can offer you the lending solution that fits your specific financial situation and provides you with peace of mind.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.