Debt Consolidation
What should I do about my debt given rising interest rates?
The Bank of Canada has hiked interest rates nine times since March, 2022 by 4.25%. There’s a chance more hikes are coming. One third of Canadian households have already seen their mortgage payments increase since February 2022. 1
Why are interest rates rising?
The economy was booming in 2020 / 2021 due in part to the government’s stimulus policies aimed to help Canadians during the pandemic. Inflation rose as consumers spent money which is very problematic because inflation erodes the purchasing power of our salaries and savings.
The Bank of Canada is responsible for fighting inflation. Their main (albeit blunt) tool for this task is to raise interest rates.
The Globe and Mail previously produced an interesting primer on interest rates.
Rates rise – consumers stop spending – the economy contracts – inflation falls – problem solved, RIGHT?
Think again….
High interest rates pose challenges when refinancing debt
Mortgages
Mortgages need to be renewed. If you renewed your 5 year mortgage in January 2022 (when interest rates were lower than today), you likely have nothing to worry about until 2027. In five years anything can happen – including the chance that interest rates will be lower. But if you have to renew in the next few months, you might be in for a shock.
Lines of Credit
Interest rates on lines of credit can change frequently if the lender sets its prime rate based on the Bank of Canada’s policy rate. So over the last 16 months (since the government has raised rates) you’ve likely seen your monthly interest payments increase. Usually, you won’t see a reduction in the bank’s interest charges until the government cuts interest rates.
Popular avenues for Canadians to secure lower rates is to either negotiate with the current lender or search for a better offer elsewhere.
Consolidation can help ease the burden of debt
If you have different debt at different lending institutions you may want to consider consolidating all of it with one lender. There are many advantages to this strategy:
- you only have to deal with one point of contact for debt strategies
- given you are bringing all your debt to one lender, they can offer you a more favourable interest rate
Click here to see how a debt consolidator calculator provide debt solutions.
Lines of credit are helpful for unexpected or larger expenses. However, if your balance has become too much to handle, converting that balance into a mortgage type product can be beneficial.
- Mortgage debt is amortized over a 25-30 year period (which lowers your monthly payments)
- Your payments ensure that you pay back a portion of the principle every month (versus just paying the interest) – so your debt is reduced after every payment
- Mortgages that have a fixed rate ensure your monthly payments are consistent. If the Bank of Canada raises rates during your mortgage period, your situation is unaffected.
- Other benefits include accelerating your payments (reduces principle faster) and forgiving a payment if you have a cashflow-crunch.
- If your chequing account is with the same lending institution you can easily move money back and forth between your mortgage, lines credit, credit cards, savings accounts and investments.
- Remember to consider your credit card balance in your strategy as the interest rate on such debt is usually much higher than a line of credit or mortgage.
It is highly recommended to speak with a financial advisor to help figure out the best strategy for your debt situation.
Jason Wodlinger has been investing for over 20 years and loves to write about money matters, financial goals and investing strategies. Jason has a Masters of Business Administration, Finance from the University of Toronto.
jason@wodlinger.com / 416.899.2750
1 Senior deputy governor Carolyn Rogers, May 18, 2023
https://financialpost.com/news/economy/bank-of-canada-flags-household-debt-banking-stress-key-risks
