BCCPA: What do the recent interest rate hikes mean for Canadians?

Andrew Smith, CPA, CA, CIRP, SAI is a Licensed Insolvency Trustee at Boale, Wood & Company Ltd.

BRITISH COLUMBIA – Canadians are feeling the effects of rising prices. Annual inflation reached a rate of 8.1% in June 2022, a level not seen for almost forty years. This has dramatically increased the cost of goods and services and means that the average Canadian can keep or save less than before.

This high inflation led the Bank to rapidly raise interest rates. As of this writing, the most recent increase occurred on July 13, when the rate hit 2.5%, up 2.25 percentage points since the start of the year. Most economists expect further increases later this year.

Here are some of the main impacts of rising interest rates on Canadians, along with recommendations on how to address these challenges.

Increase in interest payments.

Higher interest rates increase the cost of borrowing, which increases the amount of interest Canadians pay on their debt. This will be especially difficult for those with variable rate debt, such as an adjustable rate mortgage, credit card debt or lines of credit.

To put into perspective how much these rate increases affect someone’s monthly payment, if you received a $400,000 25-year amortized mortgage with a variable rate of 3% last year, your mortgage payment monthly would have been around $1,897 per month. With a two percentage point increase to 5%, your new monthly payment will now be $2,338, an increase of $441 each month.

Those with other variable interest debt should assess their financial situation and their ability to meet these rate increases. Those with an expiring fixed-term mortgage should also carefully consider their options. If you are concerned, a good option is to discuss with the organization you are indebted to potential options for restructuring the debt, such as switching to a fixed rate mortgage.

Reduction in the purchasing power of a house.

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 have a mortgage stress test, which requires buyers to qualify at either the benchmark rate of 5.25% or the rate offered by your lender plus 2%, whichever is greater. Since most fixed mortgage rates are already above 5%, people should qualify at 7% (or higher). Every increase in interest rates raises the stress test criteria for homebuyers and causes homebuyers to qualify for smaller mortgages than before. Since buyers will not be able to offer as much as has been offered in recent years, sellers may have to accept lower offers or suspend the sale of their property.

Decline in disposable income.

Canadians are already feeling the impact of rising interest rates and adjusting their budgets. In a recent MNP debt survey, nearly half of British Columbia respondents (47%) say they are cutting back on non-essential spending like travel, dining and entertainment. A quarter (26%) are reducing essential expenses such as food, utilities and housing. Another quarter (26%) say they are financially unprepared for a one percentage point increase in interest rates. And, worryingly, almost half (47%) say they are concerned about the level of debt they have.

For those concerned about finances, a good approach to getting through 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:

  • Reevaluate your spending habits and try to reduce spending on subscription services, gym memberships, and restaurants.
  • Look for sales and discounts, and be aware of price matching policies.
  • Make maximum use of your grocery store’s loyalty programs or other rewards programs.
  • Do your best not to incur additional debt if possible.
  • Maybe consolidate your debts at a lower interest rate.

For those who are still facing impending debt problems even after using the options above, here are some other tips that might help you make ends meet.

Sell ​​some of your possessions. Review what you have, and if you have items you don’t use, consider selling them and using the extra money to help pay off debt.

Try to find ways to earn more money. For example, you might be able to work extra shifts at work or take on side work.

If none of the tips above work for you, or if you try them and you’re still having trouble, you may want to talk to a Licensed Insolvency Trustee. Licensed Insolvency Trustees are the only federally licensed debt professionals to help Canadians manage their debts.

They are trained to give you a simple assessment of your financial situation and advise you on your legal options for dealing with your debts, including filing a consumer proposal. This is a process where you make an agreement with your unsecured creditors to pay off some but not all of the debt, which can lower your monthly payments by consolidating your debts.

You can find a Licensed Insolvency Trustee in your area by Superintendent of Bankruptcy Resources provided by the Government of Canada.

New investment opportunities

Interest rate increases also create new investment opportunities. Financial institutions began offering 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 lock in your money for a set term and cannot access the funds without penalty until the term is over.

Talk to a financial advisor about your investment options.

It comes from a podcast episode produced by the CPABC economist Aaron Aerts. Aaron speak with Andre Smith, CPA, CA, on what recent interest rate increases mean for Canadians. part of their Coffee talks with CPABC podcast series.

Andrew Smith, CPA, CA, CIRP, SAI is a Licensed Insolvency Trustee at Boale, Wood & Company Ltd. in Surry. He is passionate about helping British Columbians deal with their financial situation and is a financial literacy volunteer for the CPA.

Source link