For several years now, interest rates have been hovering near record lows. In fact, they’ve been there for so long that many people have grown used to being able to borrow “cheap” money.
“The focus has been for years on how much more house, car or other big ticket item the consumer can obtain because interest rates have been so low. The focus needs to now turn to paying down that debt that consumers have loaded up on for the past several years before the rates go up. If your debt load is high, it’s about to get higher, even if you don’t spend any more money,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
There is strong evidence that an interest rate hike might be around the corner. There are several factors presenting themselves in the marketplace that suggest a rate hike is very likely. And if you are already stretched thin, even a slight rate hike could present problems.
Reasons that a rate hike is likely coming
Although analysts and economists have been predicting a rate hike for years now, there is strong evidence to suggest that interest rates are set to go up soon.
For one, the U.S. Federal Reserve raised interest rates in December. Although we are our own country, we tend to follow economic trend lines set out by our neighbours to the south. It stands to reason that a rate increase in Canada will come shortly.
Another factor that will push interest rates up is inflation. Basically, inflation measures the increases in price for goods and services. According to Stats Canada, inflation went up slightly in November to 1.2 per cent. Typically, when inflation goes up, so do interest rates.
A little increase equals big money
How much matters? Even a half a per cent sounds tiny, but when you actually translate that into dollars, the increase can be substantial. And if you’re already scrambling to make ends meet, that could tip the scales into a bad direction.
Depending on how much mortgage you carry, a 0.5 per cent increase could translate into thousands of extra dollars towards your mortgage in a year (and hundreds more month to month).
If your mortgage is coming up for renewal soon, make sure to shop around to get the best mortgage rate. Lenders will often give rate guarantees 120 days in advance. If the rate goes down, you benefit, but if it goes up, you still get the rate they offered you.
Don’t forget your other credit
Although the focus is often on mortgage payments in regards to interest rates, don’t forget that all of your variable interest rate credit products will go up too (lines of credit and credit cards). How vulnerable are you?
“One way to combat the risks of a rate hike is to reduce your debt. You may want to consider a consolidation loan, which will generally offer a set interest rate over the term of the loan. Another benefit to doing that is that it lets you more easily live a cash lifestyle, because your cash flow is increased with your debts going down,” says Schwartz.