WHY RISING INTEREST RATES SHOULD CONCERN YOU

The Bank of Canada is expected to raise its benchmark interest rate by half a percentage point a few days from now.  While you may not think this concerns you, rising interest rates affect obtaining new credit and maintaining pre-existing credit.  

In layman’s terms, rising interest rates makes borrowing money more expensive.  

Mortgages 

People who borrow to purchase a home are worse off because it costs them more to finance their purchase. The rate increase is now pushing up the mortgage stress tests qualifying rate, removing many buyers from the real estate market.  If you already have a mortgage with a variable interest rate or a secured line of credit, homeowners could start paying hundreds of dollars more on regular mortgage payments. Most people do not plan for a payment increase. These increases will tighten up spending budgets and can cause financial struggles in the future.    

Student Loans

Rising interest rates affect student loans.  You can expect the cost of paying off the loan to increase. This can cause graduating students to delay major purchases in the future like cars and homes as paying off debt becomes the priority. 

Credit Cards/Lines of Credit 

When rates go up, monthly line of credit payments and credit card payments rise.  You can expect to  pay back more money over a longer period of time. If you are already struggling to make the minimum payments, it will get more difficult to do so especially if your wage has not changed. 

The Economy

Higher interest rates affect the economy.  When rates are low, the economy has a tendency to grow because households borrow money to make purchases and businesses can borrow to expand operations. When borrowing becomes more expensive, it can also mean less demand for goods and services. 

Households have already been feeling the pinch with rising gas prices, price of cars, rising food costs, housing costs and price increases on most consumer goods due to pandemic supply issues. Add to it the extra costs of borrowing money and it can stress and over-extend families to the brink of insolvency.

The Good News!

Higher interest rates can be good news for some. Savings in a bank account can grow faster. Many fixed investments like guaranteed investment certificates (GIC’s) could give higher returns.  Savers benefit because they can earn higher interest rates on their savings. Before you agree to a loan, make sure you completely understand how the interest rate will affect the total amount you owe. 

Instead of panicking when rates change, focus on building long-term savings and paying off high interest debt as soon as possible.