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A predicted interest rate hike took effect this week, following record-low interest rates Canadians have previously enjoyed.  The Bank of Canada’s interest rate raise has left many Canadians wondering how they may be impacted.  Debt management expert Licensed Insolvency Trustee Blair Mantin of Sands & Associates joined Breakfast Television Vancouver to discuss who may be most impacted by these changes, and what you can do to deal with debt if you’re on the financial edge.

Watch the clip, and read more below:

Who is Impacted by Interest Rate Changes?

  • Almost every Canadian pays attention when interest rates change, but the reality is that the impact of a rate increase can vary widely, from very significant to having no impact at all.
  • It’s useful to consider which categories of debts would be impacted to assess what consumers should do.

Credit Card Debt

  • Although many Canadians hold credit card debt and do not pay off their balance in full each month, there is likely little to no impact of this rate change on credit card debt.
  • Most credit cards are completely divorced from interest rates – i.e. you don’t hear credit cards priced at prime plus 17%, which is essentially the average cost of a card at 20% interest.
    • Some low-rate cards may have a closer tie to the prime rate, but this is very rare.
  • Keep in mind, if you miss payments on your card due to increased costs elsewhere in your budget, you could find your interest rate increases by up to 5% as a result of delinquency!
  • Overall, there is likely no direct impact on people solely carrying credit card debt.  This debt is already very expensive and small rate hikes are generally not passed on directly to consumers.

Vehicle Financing

  • Similar to credit cards, most auto loans are structured with a fixed interest rate that does not automatically change with interest rate hikes.
  • As much as 85% of Canadians finance vehicle purchases with the average term now exceeding 6 years (up from 4-5 years in the past).
  • Regardless of the structure of your loan, an interest rate increase should not cause a direct impact on your monthly payment.  A fixed rate contract will not change at all, while more rare variable rate contracts typically will simply extend the length of your payments to absorb the additional interest rate cost.
  • The bigger impact could be at trade-in – more and more individuals are opting to trade in their vehicle before the end of their financing, often absorbing ‘negative equity’ or even consolidating other debts into a new vehicle loan.
  • For loans being priced out after an interest rate hike, you can expect rates to be higher than before, leading to an increased overall cost of borrowing.

Lines of Credit

  • Most lines of credit (whether secured against your home or not) are structured as variable rate loans.
  • This means that there is a direct and immediate impact of an interest rate increase, through higher payments charged!
    • This can be very significant if you are already stretched to the limit and paying just interest only on your credit line.
  • Since July 2017, prime has increased by nearly 20% before any January 17th For someone paying interest only, they have already seen a very significant increase in required payments, and this will continue as rates escalate higher.

Mortgages

  • The biggest impact of credit rate increases is likely to be felt by homeowners who are carrying variable instead of fixed rate mortgages.
  • On a fixed rate mortgage, your payments will not increase as you have ‘locked in’ the rate you will be charged over the term of the mortgage.
    • At renewal time, however, you can expect that the rates you locked in at previously may no longer be available and your new interest rate upon renewal could be materially higher.
  • On a variable rate mortgage, quite simply, your payments will see an increase as a result of rate hikes.
    • Most banks adjust quite quickly – you should expect to see the impact even by next month.
  • Even a small interest rate hike can be very impactful. For someone with a variable mortgage of 2-3%, even a 1% increase in interest rates can translate up to a 50% increase in the interest being charged on the mortgage.

What Can You Do?

  • Don’t panic! Interest rates rise and fall with the business cycle.
    • We’ve been in a historically low interest rate environment for quite some time now – the folks most at risk are those who are most extended on their debts.  For the average person, the interest rate hike should not have drastic consequences.
  • If you’re a mortgage holder, you may want to research your options for locking in your mortgage to a fixed term.
    • Though often more expensive in the long term, a fixed rate mortgage can give you certainty for your budget.  Be sure to shop around for the best rates and consider using a mortgage broker.
  • If increased costs for your mortgages and other debts results in you getting behind on your credit card payments, consider meeting with a Licensed Insolvency Trustee to determine whether there’s the ability to restructure your credit card debt to stop the future interest and allow you to better weather the storm of potentially higher mortgage payments.
  • Take a hard look at your budget – rates are likely to continue to increase.
    • Now is the time to pay down as much debt as possible so that you can minimize the impact of future rate hikes.

To learn more about legal options to get out of debt and gain a financial fresh start, meet with a Licensed Insolvency Trustee for a free, confidential debt consultation.  Sands & Associates has 17 BC offices to serve you.

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