Ensure your household budget measures up in the face of rising interest rates.
For years, interest rates in Canada have been at record lows allowing for affordable borrowing through mortgages, car loans and lines of credit. Many Canadians took advantage of the “sale” on debt to spend more, but recent interest rate hikes were a wake-up call for those carrying large debt loads. Here’s what they mean – and how to prepare for potential future rate increases.
In 2017, after seven years of historically low interest rates, the Bank of Canada raised its key interest rates twice – from 0.50 per cent to 0.75 per cent in July, and then again to 1.00 per cent in September. These increases were followed by another hike to 1.25 per cent in January 2018.I Banks and financial institutions followed, and most prime lending rates rose incrementally from 2.70 per cent to 3.45 per cent.ii Although interest rates are still relatively low, this sparked a flurry of discussion among financial experts. What will happen if rates rise a full percentage point? How about two? Are Canadians prepared for continued increases?
Research conducted by Manulife Bank suggests that many Canadians aren’t in a position to absorb a significant interest rate increase. Seven in 10 Canadian homeowners say they could not manage a 10 per cent rise in their mortgage payments. And nearly one in four haven’t had enough money to pay bills at least once in the past 12 months.iii
Yet, Canadians have good intentions when it comes to debt – 64 per cent say that being debt-free is a top financial priority. And almost half of Canadians with debt succeeded in reducing their debt in the past year – though just 31 per cent met their debt reduction goals.iv Some smart strategies can help make your household finances more resilient, so you’re ready to adapt to potentially rising interest rates. First, it’s important to understand how higher rates may affect you.
The impact of higher rates on debt
The recent rate increases were predicted to add about $50 to $150 more per month for a household with a $480,000 variable rate mortgage.v The impact may, of course, be significantly higher or lower depending on the amount and structure of the debt.
Canadians who have stretched to take on larger mortgages or increased their lines of credit may find that their household budgets have been greatly impacted by the interest rate increases.
Isa Rahamat is a Financial Advisor with Manulife Securities Inc. – This content is provided courtesy of Solutions from Manulife.
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