The Bank of Canada has implemented rapid interest rate hikes, as the rate has increased 2.25% in just the last few months. They have also indicated we should expect further interest rate hikes in the coming year.
What does that mean to Canadians that have debt?
For those that have variable rate debt such as a line of credit, credit card, mortgage etc., it will mean that with each successive interest rate increase, your interest costs and payment amount will go up automatically.
For those that have fixed rate debt such as a mortgage with a fixed rate over a set term then your interest costs and payment will not change until the end of your term. When your term is up you will need to agree to a new term with the current prevailing interest rate at that time. Those that started fixed terms over the last 5 years have benefited form extremely low interest rates. When these mortgages get renewed now and in the coming years the interest rate charged will be much higher which will result in significant increases to their payment. Many borrowers over the next few years are in for a serious payment shock!
Let’s look at a typical scenario. Borrower has a $500,000 mortgage with a 25-year amortization. They took a 5-year term in 2017 at the very low rate of 4.64% which resulted in a payment of $2,819. Now it is coming up for renewal and the rates are now 2% higher, so the new 5-year term will be at 6.64%. This will result in a payment of $3,420 per month, an increase of $600 per month!
Many borrowers do not realize the unavoidable ticking time bomb they will have to face in the near future. Canadians have gotten very used to extremely low interest rates and whole generations have never experienced high interest rates. Budgets will be squeezed, and many will find it difficult to make ends meet with their new larger debt payments. It is very difficult to be financially healthy when your largest expense increases by 21%, indefinitely.
The best course of action is to prepare now for this future cash flow squeeze. Look for expenses to cut and pay debt down as fast as possible. Every dollar “wasted” on interest is that much less to fund your lifestyle in the future.
A good starting point is to check your financial health, so you know where you stand. We have a free financial health check on our website ResetMyDebt.ca which will check your financial vital signs and provide you with some recommendations for areas you need to focus on.
You are the only one that can protect future you from financial difficulty and ensure you are able to live your best life.
Contact us for help, 778-484-9933.