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  • Shawn Todd CFP

How would rising interest rates affect me?

Updated: Nov 16

Executive Summary

The Bank of Canada has raised interest rates 4 times since summer of 2017 and it is expected that they will continue to do so. Canadians need to prepare for a period of rising rates, as it will impact mortgages, lines of credit, student loans, savings accounts, and investments. A survey conducted by IPSO in 2016 indicated that 48% of Canadians are just $200 away from not being able to meet their financial obligations. With rates rising higher than they’ve been since 2008, households need to be aware of the impact rate hikes could have on them.


Why Are Rates Rising?

The economy is currently doing well and it is said to be operating at capacity. When the economy is at this point in a business cycle it typically comes with increased inflation. However, there is very little inflation right now. Rates are being raised as a proactive safe guard against looming inflation. In short, it suppresses spending a little to keep everything evened out.


Is This Good or Bad?

Rising interest rates are a concern due to the heavy debt loads many Canadians are carrying. Canadian debt is at an all time high and higher interest rates mean higher debt payments.


What Loans Will Be Affected?

All loans may be affected by these rate hikes, with a few exceptions. Credit Cards typically have a fixed interest rate and are not affected by rate changes. Mortgaged with fixed rates are also unaffected, but only until they renew. Other than that, any debt that carries a variable interest rate will see the affects immediately. These may include student loans, lines of credit, home equity lines of credit, and business loans.


How Can You Prepare?

Since interest rates are expected to keep rising, it can be a smart idea to do a stress test on your budget to see how you will cope with increased debt payments. This may be a good time to both re-evaluate your spending and to focus even more heavily on debt elimination.

If you are considering taking on more debt, make sure you shop around. One size does not fit all and it is important to make sure you know what you are signing into.


The Bottom Line

The next interest rate announcement is December 5, 2018. Whether or not rates will rise again is yet to be seen, but it is very likely that they will go up in the future, if not next month. While Canadians do not need to panic, it is important to be aware of how interest rates will affect your budget and to plan for the changes.


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