Rising interest rates: what it could cost you and what to do about it
What goes up must come down—until it eventually goes back up again.
Yes, we’re talking about interest rates.
As for the impact rising rates could have when it comes to the debt you carry—well, if you have a fixed-rate mortgage that was locked in prior to 2022, you can sit back relax for now (at least until it’s time to renew).
However, if you have a variable-rate mortgage, you’ve probably already begun to feel the pinch.
That’s because the interest levels on these types of mortgages fluctuate in relation to the Bank of Canada (BoC) overnight rate. And the scope of the financial impact of every BoC rate increase will depend on the type of variable-rate mortgage that you may hold.
For example, if you have an adjustable-rate mortgage, rate hikes will cause the entire mortgage payment to increase. While this translates to dishing out a higher amount in interest each month, the principal (the amount that goes towards repaying the loan) actually remains the same.
On the other hand, if you have a standard variable-rate mortgage, you are making fixed payments that are consistent on a month-to-month basis. The amount (of those payments) that goes towards the principal then fluctuates depending on the BoC overnight rate. As those rates continue to inch higher, it’s possible to reach what is called a ‘trigger rate’. This is the point at which the interest on a standard variable-rate mortgage has increased so much that your regular payments are not enough to cover all the interest that is owed.
Looking ahead, the Bank of Canada estimates that mortgage costs could rise by 30% over the next 5 years.
That estimate takes into consideration new Canadian homeowners who purchased their home in the last year or two (and will be renewing their mortgage within the next 5 years). Yet regardless of the type of mortgage you have or how long you’ve had that mortgage for, one thing is for certain—rising interest rates impact everybody.
With that in mind, how can you go about minimizing the impact of rising rates when it comes to your monthly budget?
For starters, it could mean having to downsize some of your regular spending habits (such as eating out and other non-essential purchases) and postponing any bigger plans you may have had coming up (e.g., spring break/summer travel or new car purchase).
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 the event that you happen to have a bit of surplus cash flow each month, consider putting more money toward you debt or increasing the frequency of your mortgage payments.
After all, besides 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.
To get time working more favourably on your side, consider switching your mortgage payments from monthly to accelerated weekly or bi-weekly, which 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 debts into a mortgage or secured line of credit.
If you’re making multiple debt repayments each month, all at varying interest rates, you’re stretching your finances unnecessarily. A mortgage or secured 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 should interest rates continue to rise.
Do you have a mortgage renewal coming up? Be sure to seek out advice and avoid waiting until the last minute.
Because 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 (rising) rate of interest. Reviewing your mortgage renewal 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 mortgage agents 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 to free up monthly cash flow—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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