Rising interest rates: what it could cost you and what to do about it
(Reading time: 3:30)
What goes up must come down—until it eventually goes back up again.
We’re talking about interest rates of course.
As for the potential impact rising interest rates could have when it comes to the debt you carry—well, let’s put things 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.
The best time to get that debt under control is naturally when interest rates are low (as more of your money will go toward paying down the principal). And while interest rates are currently at historic lows, inflation also happens to be at an all-time high. Which means interest rates will inevitably have to rise in order to slow spending and curb the rate of inflation.
Those rate hikes could begin as early as spring of this year.
In fact, several Canadian economists are predicting there will be as many as four rate increases in 2022, which could bring the key-lending rate from the current 0.25% to as high as 2.00% by the end of the year. Now let’s say their predictions are a little overzealous and the Bank of Canada (BoC) decides to keep those rate hikes to just 0.25 basis points each. That one percent total interest rate increase would mean having to spend an additional two cents on debt repayments for every $1 of household income.
How much of an impact could two cents possibly have in the grand scheme of your monthly budget?
It adds up to roughly $130 more a month in debt repayments, which works out to $1,560 a year—and that’s just on debt other than your mortgage.
Speaking of your mortgage, here is a little pop quiz for you:
True or false: a one percent hike in the BoC rate would mean that the interest rate on your mortgage would only go up by 1%.
That would be false.
For example, let’s say you currently have a variable mortgage at 1.75%. Since variable rates are generally set to the current level of interest rates, that 1.75% would then become 2.75%—that’s an increase of (just over) 56%.
So, is it time to start taking an interest in interest rates?
Well, yes—although if you’re holding any type of debt, you should probably always be on top of interest rates. That way you’ll be able to better gauge your budget when it comes to paying debt down faster when rates are low and avoid feeling the pinch when rates begin to climb.
With that in mind, you might want to start throwing extra money towards your debt now while interest rates are still relatively low.
If this means downsizing some of your spending plans for the year, it’ll definitely be worth the sacrifice in the long-term. Because once rates start climbing, you could be looking at higher monthly debt payments and a tighter cash flow.
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.
In addition to putting more money toward you debt, consider increasing the frequency of your 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 will cost you.
If you have a mortgage, simply switching from monthly to accelerated bi-weekly payments can severely cut down your amortization period and save you loads of money in interest over the duration. The same goes for credit cards and loans. Making payments twice a month (versus just once) will mean you’re putting even more money towards paying down the principal.
Another course of action is to 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 and saving you money in the long run. Something you’ll appreciate, particularly once interest rates begin to rise.
Do you have a mortgage renewal coming up? Renew early before rates go up.
Plus depending on how your life has changed over the past few years, there could be a lot more to consider about your mortgage than just the rate of interest. Renewing early will give you the added advantage of time to properly re-evaluate your existing mortgage to see if it’s still right for you. Also, don’t be afraid to shop around and compare your options before renewing with your current mortgage provider.
Tip: 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 on all monthly bills to keep your rating in good standing.
If the thought of rising rates has you feeling anxious, sit down with one of our accredited mortgage professionals and get an educator-specific opinion.
Whether you’re shopping around for your first mortgage, about to renew an existing mortgage, or want to consolidate multiple high-interest credit cards and loans before interest rates start to climb—reach out to Educators Financial Group. 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 needs and provides you with peace of mind.
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