Crowe MacKay & Company's Licensed Insolvency Trustees in Vancouver and Surrey help Canadians understand how higher interest rates and inflation may impact their day-to-day budgeting. While rising costs affect how far your dollars will go, relief options are available.
Rising inflation and discussions of a recession in 2023 have more people in British Columbia concerned about dealing with increased interest rates. To combat inflation, on December 6, 2022, the Bank of Canada raised the policy interest rate, otherwise known as the Prime interest rate, by 0.5%. On January 25, 2023, another increase of 0.25% was implemented, making the current Prime interest rate for lending 6.70%.
How Prime Rates Impact Variable Interest Rates
The Prime interest rate has a direct impact on any credit with a variable interest rate, such as:
- Line of credit
- Personal or business loans
- Student loans
- Vehicle loans
Variable interest rates fluctuate based on the Prime interest rate. Typically, loans also include an additional percentage which is added on by the lender. For example, a variable interest rate of “Prime plus 3” means you will be paying interest based on the current Prime rate plus an additional 3%. Currently, that would be 9.70% (Prime 6.70% plus 3%). However, variable interest rates change depending on the market, borrowers should be prepared for any increase or decrease they may see over time.
How Variable Interest Rates Can Impact You
The bottom line, the cost of borrowing money has increased dramatically over the last year, and the rising Prime rate is making servicing current variable debts costly. But, how is the rising interest affecting you personally?
If you are a homeowner, ‘rate hikes’ may be of genuine concern to you. For those with variable rate mortgages with a fixed payment, this means when the interest rate increases, less of your payment is going toward the principal balance. In turn, paying off your mortgage will take even longer. If the interest rate increases to a point where the fixed payment is now only covering the interest and not paying down any of the principal, which is known as the trigger rate, the result is an unexpected increase to the fixed monthly payment. It is wise to review your payments and estimate your trigger rate.
For those with a variable rate mortgage with a variable payment amount, the size of the monthly payment fluctuates based on the Prime interest rate. When Prime increases, so do monthly payments. This way, you are always paying the same amount towards the Principal balance of the mortgage, but the rising interest rates increase your payment amount. It is important to know what you can afford to pay monthly. If you are reaching your maximum, it may be time to look into a fixed-rate mortgage.
Those with fixed-rate mortgages, however, are also affected by the increase in Prime interest rates when renewing their mortgage. For example, a 5-year fixed-rate mortgage in 2020 could be locked in for as low as 1.49%. However, if you are looking to renew your mortgage in February 2023, you’re looking at a rate of 4.28% to 6.34%. Once locked in at your new rate, you’re still possibly looking at a higher monthly payment amount or longer payment term.
A variable interest rate on personal loans, including vehicle loans and student loans, has the same effect as it does on a mortgage. The increases to the Prime rate mean you’re paying more towards interest each month and less towards your principal balance. This means it will take you longer than originally expected to pay off the loan and cost more by the time you’re finished. Depending on your variable interest terms, it may be wise to look at locking into a fixed-rate loan. Fixed interest rates for a personal loan can vary from 5.4% to 47% depending on your credit score, security pledged, and other criteria set by the lending institution.
It is also important during times of rising interest rates to keep an eye on your investments. When interest rates are on the rise certain investments benefit such as savings accounts, GICs, and money market accounts. However, other investments such as stocks and bonds become more volatile. This can affect your retirement fund and emergency savings depending on how you have structured them. Many have found that they can no longer depend on these to be their safety net to balance out their debts.
One of the few things not impacted by the increase of Prime is most credit cards. The majority of credit cards already have a higher fixed interest rate of 19.9% and the Prime rate does not change this. That being said, carrying a balance consistently on a credit card is costly and is a warning sign of financial troubles ahead. If you cannot pay off your credit card each month and continuously ‘need’ to use it to make ends meet, it is time to look at better options to fix your situation. A trusted Licensed Insolvency Trustee at Crowe MacKay & Company can help you manage your spending habits, book your free consultation today.
Managing Higher Interest Rates
It is important to realistically evaluate the impact current economic conditions have on your finances. You may look at your debt load currently and consider it ‘manageable.’ But, is there a light at the end of the tunnel or are you just servicing the debt each month and remaining in the same financial situation year after year?
If interest rates continue to rise, how close are you to reaching your breaking point? Maintaining a consistent debt load, even if you are servicing the debt, will not allow you to get ahead until you find a way to reduce or eliminate the debt. It’s time to explore your debt relief options and minimize the impact increasing interest rates have on your pocketbook.
Our professionals can review what options you have, including:
- Consolidating your debts – what will one monthly payment and its interest cost you in the long run?
- Debt management program – reduce or eliminate interest and structure payments.
- Consumer Proposal or Division 1 Proposal – No interest and reduced structured payments.
- Bankruptcy – is it the end? If this is your only option, learn how bankruptcy will impact you in the short and long term.
Our professionals at Crowe MacKay & Company Ltd. can assist you with weighing the pros and cons of each option along with the long-term impact your decision will have on your financial future. With the support of our Licensed Insolvency Trustees, a secure financial future is within your reach.
At Crowe MacKay & Company, we have over 60 years of experience and offer free initial consultations. If you have any questions regarding the information above, contact our office today and start your debt relief journey.
This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual needs. This publication is not a substitute for obtaining personalized advice.
If you require corporate or personal Insolvency services, Crowe MacKay & Company provides custom solutions for clients, allowing them to live debt-free.