That another increase in the key interest rate and the impact on interest rates will hit many households. Here’s what you can do today to avoid the worst.
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• Also read: Answers to three frequently asked questions about debt
By raising interest rates to 4.25%, the Bank of Canada is sticking to its strategy of calming inflation. However, this hike will directly impact several interest rates that are also set to increase in the coming days, most notably personal and mortgage loans, adjustable-rate mortgage loans, and auto loans. With this seventh straight rise since the beginning of the year, consumers are increasingly struggling to balance their budgets and debt has risen to pre-pandemic levels.
How can you specifically limit the damage and ensure that you do not worsen your financial situation even more?
Mortgages to look at
One of the main sources of household debt is their mortgage. Anyone who has taken out a variable-rate loan must expect rising interest rates in the coming days. “There are two categories of variable-rate mortgage loans: those with a fixed payment and those with a variable payment,” recalls Pierre Fortin, qualified insolvency practitioner and President of Jean Fortin et Associés.
If you chose the former, your mortgage payment won’t change despite the increase, but you’ll pay less principal and more interest, which will affect the maturity date. If you have a variable payment loan, the payments you have to make will soon increase. So it’ll cost you more, but at least you’re still paying the same share of capital. Start planning this increase in your budget now.
But be careful, warns Pierre Fortin, because even if your payments are firm, it’s possible you’re now exceeding the famous trigger rate, above which the mortgage payment will no longer allow you to repay the interest due for the period.
His advice: Contact your financial institution today. Depending on the case, you can ask for an increase in your mortgage payments to avoid being in bad shape when your loan matures. You can also consider extending the payback period. For example, if you have a 25-year mortgage and five years have passed, ask to extend the term to 25 years starting today. “It gives you the financial boost you need, the time to get through this difficult time,” stresses Pierre Fortin. You may have to re-qualify to get this loan and pay some fees, but it may be worth the effort. Note, however, that this is a short-term solution as interest costs will increase significantly.
For owners of a fixed-rate mortgage that is due to expire in the next few months, Pierre Fortin recommends checking the expiry date, calculating and putting money aside in anticipation of rising interest rates.
Eliminate consumer debt
Analyzing your budget to clearly determine the place of consumer debt is the other contingency measure to apply. If that percentage is too high and a significant portion of your income goes toward paying down your lines, credit cards, and personal loans each month, you need to find a way to reduce it so you don’t end up losing it all.
Remember that you must first pay off your debts with the most expensive ones, i.e. those with the highest interest rates (credit and debit cards). You could eventually use your line of credit, which consumes less interest, to pay off your card balances.
“We need to eliminate all superfluous spending in order to spend the maximum amount of money on debt repayments. But after that, it’s not always possible to tighten your budget even further to free up cash. In this case, debt consolidation or mortgage refinancing is possible if your situation lends itself to it,” mentions Pierre Fortin.
TIPS:
- Do you have a fixed-rate mortgage that is due in the next few months? Anticipate future increases in your mortgage payments and save for them.
- If you have an adjustable-rate, fixed-payment mortgage, quickly contact your financial institution to plan a new game plan.
- Reduce your consumer debt as much as possible, starting with the most expensive ones (credit cards).
- Consider debt consolidation if you can’t get out of debt. A consumer filing and bankruptcy may be required as a last resort. Contact a licensed bankruptcy practitioner to learn more about your options.
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