How would your debt be affected by a 1% interest rate increase?

A new study by credit rating agency TransUnion has found that nearly one million Canadians might not have the cash flow to cope with a one per cent increase of the interest rates on their debt. And while it’s very rare that interest rates would rise that much in one fell swoop, most of those Canadians—over 700,000—would still struggle if rates rose by as little as one-quarter of a point, or 0.25 per cent.

To put things in perspective, if you owed $50,000 on a line of credit, your interest payments would rise by almost $10.50 a month with a quarter-point increase, and over $40 per month if interest rates rose by one per cent. These may seem like small sums, but for Canadians whose budgets are already being stretched, an additional 40 dollars in monthly debt might be difficult to manage.

Now, an interest rate increase might not be on the immediate horizon—economists are predicting it won’t happen until late next year. But as the Financial Post points out, a sense of complacency could be setting in as rates remain near record lows; many Canadians might be under the impression that rates will never rise, leaving them unprepared for an eventual rate increase.

Why your mortgage rates might rise sooner

Even if the Bank of Canada (BoC) won’t raise interest rates anytime soon, Canadians might see a more immediate increase on their mortgage rates. As financial columnist Rob Carrick explains, fixed-rate mortgages aren’t based on the BoC’s interest rate, but rather on the bond market. And Canadian bonds are often affected by what’s going on in the States. With the U.S. Federal Reserve talking about raising its rate much sooner than the BoC, Canadian fixed-rate mortgages could see a rate increase in the next six months.

In any case, it’s highly unlikely that rates would rise one per cent overnight. But low interest rates are often a sign of slow income and employment growth—in other words, you’re not likely getting a big pay raise, either. As Carrick concludes, “In that kind of world, the best move on debt is to get rid of it.”

Stress test your debt before interest rates rise

To get ahead of an interest rate increase, it’s important to stress test your budget to see if you’ll be able to manage higher monthly debt payments. This is best achieved using a budget worksheet or online budget tool, which allows you to adjust your expenses and automatically recalculates the amount owed. You can try adding an additional 10 or 40 dollars to your monthly debt to see if you still have a surplus at the end of the month. If not, now is a good time to take a closer look at your other monthly expenses to see if there’s anywhere you could trim your spending.

We understand that it can be difficult to reduce spending ahead of an interest rate increase, especially with food costs going up, and hydro rates reaching increasingly unaffordable levels in some provinces. However, one cannot continue to expect interest rates to remain at their current low levels indefinitely; your best bet is to pay off your debt before they eventually start to rise.

Could you afford a $40 increase to your monthly debt payments? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt