The Bank of Canada has raised their interest rates for the second time this year, and while economists assure us that this is a sign of faith in the stability and growth of our economy, the increased rates will impact the costs of debt for residents of Toronto and Hamilton, as well as every household across the country. Proactive strategies, like debt consolidation, can help you minimize the impact of the rate hike.
In this blog, we will answer some common questions to help you understand and protect yourself from these changes.
What Does This Mean for You?
While Canadians don’t borrow directly from the Bank of Canada, its federal interest rate largely determines the ‘prime’ interest rate upon which banks and other lenders base their own rates. On Wednesday, September 6th, the central bank’s interest rate rose from 0.75% to 1.0% (following the first increase in July, from 0.5% to 0.75%), and many of the larger banks have already moved to match by raising their own prime rates to 3.2%.
The impact may be significant. Canadians are carrying more debt than ever, and an increase in interest rates will affect your ability to meet your obligations, while making your existing debts more difficult to pay off on a timely basis.
Which debts can expect an interest rate increase?
The interest rate hikes will apply to debts of all types, including credit cards, lines of credit, mortgages, loans, and more.
Which debts will not be affected?
Any fixed-rate interest fees are locked at the original rate. Fixed rates are a common option for long-term loans, such as mortgages and student loans, though in most instances where ‘fixed rate’ is an option, there is usually a ‘floating rate’ option as well that will increase with the Bank of Canada’s rate increase.
Will Rates Continue to Rise?
While we can’t say for certain, economists believe that it is very possible that the Bank of Canada’s rates will continue to climb. In fact, the chief economist from one of Canada’s big banks has publicly speculated that the central bank’s rate may climb all the way to 1.5% by mid-2018.
How Can You Protect Yourself?
Interest rate hikes are nothing to be afraid of, as long as you plan for them accordingly. Preparing for an increase in interest rates can be simplified into three key pieces of advice:
1. Reduce Your Debt Wherever Possible
While eliminating debt outright is often not an option, it’s always a good idea to minimize your debt where you can. Always pay down your high-interest credit cards quickly, and don’t hesitate to pay your non-fixed-rate loans off early. Debt consolidation may be an effective option to reorganize your debts into one manageable payment plan, with reduced interest rates.
Essentially, the less debt you have, the less of an impact these rate hikes will have on you.
2. Buy Early at a Fixed Rate
If you’re considering making a purchase for which you will need a loan, such as a car or a home, purchasing with a fixed rate (or, in the case of a car, a ‘zero percent financing’ option) can allow you to ‘lock in’ before the rates rise any further.
Just make sure that you can afford the associated payments. Even if the investment costs you less than it might in a few years, it will still cost you. Always purchase responsibly!
3. Shift Your Debt from Variable to Fixed Rates
While you might not be able to completely pay down all of your outstanding variable-rate debts, it’s often possible to pay them down by borrowing through a lower, or more stable fixed-rate loan.
Is Debt Consolidation an Option for Residents of Toronto and Hamilton?
Absolutely! Through debt consolidation, your outstanding debts can be shifted away from the rising variable-rate lenders, towards lenders with either fixed rates or lower variable rates. As an added bonus, this often makes your debts much easier to manage and pay off. Instead of paying down a number of credit cards, personal loans, auto loans, mortgage payments, etc., debt consolidation allows you to pay for multiple loans through one easily-managed payment plan.
Of course, there are other options for anyone who is struggling with debt, including credit counselling, Consumer Proposals, or Bankruptcy. If you would like to put an end to unmanageable debt, call us today to schedule a free consultation with one of our experienced Licensed Insolvency Trustees. We’re here to help you get a fresh start and lead a FULLER life.
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