In my Rent vs Buy blog post I shared a scary stat “718,000 people with debt would be seriously affected if interest rates just 0.25 of a percentage point”. As of July 12th, 2017 this statistic became reality for many Canadians. For the first time in 7 years, the Bank of Canada increased the interest rate point to 0.75%, a 0.25% increase. The Bank of Canada made the decision to hike up the interest rate after super low rates have encouraged Canadians to take on significant debt. In return, housing markets, especially hot markets such as Toronto and Vancouver, have become over inflated making it very difficult for first time buyers to comfortably afford a home. Consequently, Canadians that are putting money towards their savings are not generating compelling returns.
But what does all of this really mean?
Well for starters, this increased interest rate determines the rate at which banks lend money to each other. In fact, some of Canada’s largest banks also increased their prime interest rates by a quarter of a percentage point to 2.95%. This will have an impact on floating-rate loans (or variable/adjustable loans) such as variable-rate mortgages, lines of credit, credit cards, student loans, and automobile loans. Now, the emphasis here is on varied rate loans. Not all lines of credit, credit cards, student loans, or automobile loans come with a fixed rate so to avoid any surprises on your next bill I HIGHLY recommend looking into your loans and familiarize yourself with the terms of agreement. Understand how this rate increase will impact your payments and budget accordingly. Secondly, there is no better time than NOW to pay off those debts, starting with the ones that charge the highest interest because those will be the ones that hurt you the most.
However, there is a silver lining to the hiked up interest rate. NOW is the time to start saving! While the higher interest rate might negatively impact your debt, it will positively impact your savings. The interest rate will correspond to your savings return on investment.
So what’s the moral of the story? Historically low interest rates have created a society that lives off debt with minimal savings. And this is just the beginning as experts expect the rate to continue to rise. The increased interest rate will hopefully result in a change in behaviour. Canadians need to stop taking on debt they can’t afford and start contributing to their savings. So what can you do?
Consider these 4 things:
- Look at your current debts. Identify which debts have fixed interest rates and which debts have varied rates.
- For your debts with varied rates see how the increased rate could impact your budget. Perhaps it’s time to look at making some budget cuts to account for the new rate.
- Start paying off those debts, especially your debts with the highest interest.
- Start saving! Rather than letting the increased interest rate work against you, make it work for you!
I will finish with this quote “Do something today that your future self will thank you for”.
The Accountant’s Wife