Andrew Smith, CPA, CA, CIRP, LIT is a Licensed Insolvency Trustee at Boale, Wood & Company Ltd.
BRITISH COLUMBIA – Canadians are feeling the pinch from rising prices. Annual inflation reached a rate of 8.1 per cent in June 2022, a level we haven’t seen in nearly forty years. This has driven the cost of goods and services up significantly, and means the average Canadian gets to keep or save less than before.
This high inflation led the Bank to rapidly raise interest rates. As of the time of this writing, the most recent increase was on July 13 when the rate reached 2.5 per cent, up 2.25 percentage points from the start of the year. Most economists expect additional increases later this year.
Here are some key ways that higher interest rates impact Canadians, and some recommendations on how to navigate these challenges.
Increased interest payments.
Higher interest rates increase the cost of borrowing, raising the amount of interest Canadians pay on their debt. This will be particularly hard for those who have debt with a variable rate, such as a variable rate mortgage, credit card debt, or lines of credit.
To put into perspective how much these rate increases affect a person’s monthly payment, if you received a $400,000 mortgage amortized over 25 years with a variable rate of 3 per cent last year, your monthly mortgage payment would have been about $1,897 a month. With a two percentage point increase to 5 per cent, your new monthly payment will now be $2,338, which is a $441 increase each month.
Those with other variable interest debt need to assess their financial situation and ability to weather these rate increases. Those with a fixed term mortgage set to expire should also carefully consider their options. If concerned, a good option is to speak with the organization you hold debt with about potential options to restructure debt, such as moving to a fixed rate mortgage.
Reduced home-buying power.
Higher interest rates reduce the amount of capital the average Canadian has access to, such as applying for a mortgage. In Canada, home buyers are required to pass a mortgage stress test, which requires buyers to qualify at either the benchmark rate of 5.25 per cent or the rate offered by your lender plus 2 per cent, whichever is higher. Since most fixed mortgage rates are already over 5 per cent, people must qualify at 7 per cent (or more). Each interest rate increase raises the stress test criteria for home buyers, and results in home buyers qualifying for smaller mortgages than they would previously have qualified for. Since buyers won’t be able to offer as much as what was offered in recent years, sellers may have to either accept lower offers or hold off selling their property.
Lower disposable income.
Canadians are already feeling the impact of interest rate hikes and are adjusting their budgets. In a recent MNP Debt survey, nearly half of BC respondents (47 per cent) say they’re cutting back on non-essentials such as travelling, dining out, and entertainment. A quarter (26 per cent) are cutting back on essentials such as food, utilities, and housing. Another quarter (26 per cent) say they’re not financially prepared to deal with an interest rate increase of one percentage point. And worryingly, nearly half (47 per cent) say they’re concerned about the level of debt they have.
For those concerned about finances, a good approach to navigate this period of uncertainty is to review your cash flow and prepare a budget. This will allow you to determine where your money is going and you can revise your budget.
Here are some tips that can help you control your spending:
- Reassess your spending habits and try to reduce spending on wants such as subscriptions services, gym memberships, and dining out.
- Look for sales and discounts, and be aware of price matching policies.
- Use your grocery store loyalty or other rewards programs to their fullest.
- Do your best not to take on additional debt if possible.
- Possibly consolidate your debts to a lower rate of interest.
For those who are still facing looming debt challenges even after using the options above, here are a couple other tips that could help you make ends meet.
Sell some of your possessions. Review what you have, and if you have items you are not using, consider selling them and using the extra cash to help pay off your debts.
Try to find ways to make more money. For example, you might be able to do extra shifts at work, or take on a side job.
If none of the above tips are working for you or you are trying them and you still are struggling, then you may want to speak with a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only debt professionals licensed by the Federal government to help Canadians deal with debt.
They are trained to give you a straightforward assessment of your financial situation and advise you of your legal options in dealing with your debts including filing a consumer proposal. This is a process where you make an agreement with your unsecured creditors to pay back some of the debt but not everything, which can reduce your monthly debt payments by consolidating your debt obligations.
You can find a Licensed Insolvency Trustee in your area through the Superintendent of Bankruptcy resources provided by the Government of Canada.
New investment opportunities
Interest rate increases also bring about new investment opportunities. Financial institutions have begun to offer significantly higher interest rates on investment products, such as Guaranteed Investment Certificates (GICs) or bonds. One thing to keep in mind, is that for some products such as GICs, you are locking in your money for a fixed term and cannot access the funds without penalty until the term is over.
Speak to a financial advisor about your investment options.
This is from a podcast episode done by CPABC’s economist Aaron Aerts. Aaron speaks with Andrew Smith, CPA, CA, about what recent interest rate increases mean for Canadians. Part of their Coffee Chats with CPABC podcast series.
Andrew Smith, CPA, CA, CIRP, LIT is a Licensed Insolvency Trustee at Boale, Wood & Company Ltd. in Surrey. He is passionate about helping British Columbians deal with their financial situations and is a CPA financial literacy volunteer.
