According to a recent report from TransUnion, 1 million Canadians would struggle with a full percentage point increase in their variable borrowing rate. For example, this would account for approximately $200 extra dollars a month in a mortgage payment.
Variable rate borrowers face immediate increases in payments when rates shift. Generally, the largest form of debt many Canadians hold is a mortgage, which many have assumed under historic lows in interest rates. But how long will these interest rates stay low? Those facing mortgage renewals in the upcoming years may also discover a sudden increase in interest rates may make future payments unmanageable with their existing incomes. Do you have a plan in place to handle an increase in interest payments?
The old adage concerning interest rates remains true, it’s not ‘if’ rates will go up, but rather ‘when’. There doesn’t appear to be any immediate movement by the Bank of Canada to increase their key overnight interest rate, but eventually as the economy improves, the interest will rise. Do you have a plan in store when rates increase? If $50, $100, or even $200 extra in payments a month could put you in financial trouble today, what is your plan to reduce your expenses, or increase your income, in preparation for an eventual shift? Is a downsizing in order to responsibly prepare for an inevitable increase? Having a detailed plan to prevent a future credit crisis will ensure you remain in a healthy financial position regardless of changes to interest rates that are completely out of your control.
Another scenario in the event of dramatic increases (or even gradual increases) in interest rates, is to move to a fixed rate instrument, be it mortgages or otherwise. The certainty in payments can help you manage future expenses with greater ease.