July 22, 2024
Interest rates have varied greatly in recent years. Why is this? And how can you best minimize the impact of these fluctuations? We explore the best options here.
It seems like anytime we look at the news now, we hear about interest rates and a rising cost of living crisis. In 2024 and 2025, 2.2 million of mortgages will have to be renewed. With the current interest rates environment, this will mean higher monthly payments for many people in the country.
Interest rate hikes in recent years have made it more expensive to borrow money in other areas as well, such as personal loans.
So why have interest rates risen? How do they affect you? And perhaps most importantly, is there any way you can minimize the impact of high interest rates?
There are many reasons why interest rates have risen in recent years, so here’s a quick snapshot.
The COVID-19 pandemic caused the federal government to create unprecedented fiscal policies like CERB and CEBA to help individuals and businesses stay afloat. There were also supply chain issues following the pandemic and the war in Ukraine caused energy prices to rise as well.
These, among other factors, caused inflation to increase dramatically.
The Bank of Canada began to raise interest rates in March of 2022 with the hope of bringing inflation down.
The basic principle behind this is that by raising interest rates and making borrowing more expensive, the bank hoped to reduce consumer spending, which in turn would lower inflation.
Yes, but slowly. In April 2024, inflation was hovering just under 3% in Canada, well down from a high of 8.1% back in June of 2022.
The Bank of Canada expects inflation to stay at about 3% into the second quarter of this year before falling below 2.5% in the second half of 2024.
But while inflation is falling, many prices are still going up. That’s because falling inflation does not necessarily mean falling prices. It just means that the rate at which prices go up is lower.
The Bank of Canada looks at inflation in a big-picture way. Individual sectors of the economy have different rates of inflation. That’s how, in the grocery store, you might notice the price of pasta increase a lot over the course of three months, while egg prices might remain about the same.
Overall, it does, however, seem that inflation is coming down due to the raising of interest rates.
In June 2024, the Bank of Canada cut its key interest rate for the first time in four years, a generally positive sign for the economy.
The rate cut has yet to help Canadians, though, according to a poll by CPA Canada and BDO Debt Solutions.
The poll indicates that interest rate increases in the past two years have negatively impacted the debt loads of almost half (48%) of Canadians.
There's also skepticism that further rate cuts will help, with 52% saying that lowering rates in the future will have no impact on their debt loads.
The most obvious way interest rate hikes have affected Canadians is through mortgages. Both current and prospective homeowners feel even a slight increase in interest rates.
The connection between interest rates and mortgages is relatively simple. When the Bank of Canada raises interest rates, it costs financial institutions (the places you bank) more to borrow money.
Financial institutions then pass these costs on to you in the form of higher lending rates. That means a higher interest rate for mortgages.
If you have a fixed-term mortgage, you won’t feel the impact right away. You’ll continue to pay the same amount you negotiated until your mortgage comes up for renewal.
Those with variable mortgages cannot say the same, as the interest rate on these mortgages fluctuates based on decisions made by the Bank of Canada. If the bank raises the interest rate, the interest on the mortgage will also rise, and vice versa.
A home equity line of credit (HELOC) is a type of revolving credit that allows homeowners to borrow against the equity in their home. It operates like a credit card, where borrowers can access funds as needed up to a predetermined credit limit.
HELOCs usually have a variable interest rate and are therefore affected when the Bank of Canada hikes interest rates.
Personal loans are loans that financial institutions give to individuals for personal use. They can be used to finance a major purchase like a car, cover unexpected expenses, or for any manner of other reasons.
Most personal loans have a fixed interest rate, meaning they are unaffected by rising interest rates. Most financial institutions do offer personal loans with variable rates as well, and these can be affected by interest rate hikes.
It’s important to review the terms of any personal loan before signing. If you have taken out a personal loan and are unsure if it has a variable or fixed interest rate, it’s best to contact the financial institution to ask.
The best way to proactive to minimize the impact of high interest rates. Here’s some the best strategies to take.
Budgeting is key to handling any increase in interest rates. By having a budget in place, you can identify areas to reduce spending and put more money towards debt repayment, thereby mitigating the impact of higher interest rates.
By tracking income and expenses closely, budgeting allows you to make informed decisions about your finances, ensuring you can meet your financial obligations.
If you don’t have a budget, there are lots to choose from; check out the pros and cons of five of them here.
You can also use our budget planner tool to help get you started.
Attacking your high-interest debt before ones with lower interest is a good idea for several reasons. It’s also being referred to as the avalanche method.
Most obviously, you’ll save money in the long run by paying these debts down and avoiding high interest fees. This has an added benefit as well.
By saving money on interest, you’ll free up additional funds that you can then use to pay down other debts.
So, if you have a HELOC with a variable rate, meaning the interest rate increased due to decisions made by the Bank of Canada, you’ll want to prioritize paying it back faster.
You may want to consider debt consolidation if you have many debts with high interest rates.
Consolidating your debts means taking separate bills and combining them into one monthly payment. Debt consolidation often offers a lower interest rate than a credit card, meaning consolidating debts will save you money over time.
Another advantage of debt consolidation is that it can help improve your credit score. Having only one payment makes it easier to stay on top of your financial obligations and avoid missed or late payments. Paying on time will improve your credit score over time, as payment history is a significant factor used in calculating credit scores.
Perhaps the most important thing you can do if you’re feeling the pinch of high interest rates is to avoid taking on more debt.
This means making what can sometimes be tough decisions between wants and needs.
Adding more debt to an already burdensome financial situation can increase the risk of borrowing beyond your ability to pay it back. Borrowing beyond your ability to pay it back will likely affect your credit score and lower your chances of getting approved for loans in the future.
It can also mean becoming insolvent, meaning you are unable to pay your debts when they are due.
If high interest rates are affecting your finances and you’re falling deeper and deeper into debt, we can help.
Our team of Licensed Insolvency Trustees can assess your financial situation in as little as one hour during a free consultation. They can provide guidance and present you with a clear pathway to become debt-free.
Options like a consumer proposal can stop creditors from contacting you or garnishing your wages. It can also reduce your debts by up to 80%. They’ll explain the pros and cons of all your options and be with you every step of the way.
July 22, 2024
Interest rates have varied greatly in recent years. Why is this? And how can you best minimize the impact of these fluctuations? We explore the best options here.
