Interest Rates Up – How This Affects You
By Nizam Shajani, CPA, CA, MBA, Partner
On July 12, 2017, the Bank of Canada raised the interest rate for the first time since 2010. This will increase the cost of borrowing for Canadians. Now would be a good time to revisit amounts you have borrowed and re-evaluate your budgets to verify if you are living within your means.
If you have a locked in term loan for your mortgage – there will be no changes for the remainder of your term. However, you should prepare for an increased rate when your mortgage is up for renewal. It is important to note the increase on say a five-year mortgage renewal is not inevitable as although the overnight rate is higher, it may be possible that the five-year rate is lower on renewal than it was five years prior. Shop around for the best rate.
Variable rate loans will have an immediate impact for an increased cost of borrowing. This will often be seen in home equity lines of credit (HELOC). While a relatively easy and convenient way to borrow, HELOCs can be habit forming and take years to pay back. Without due consideration, this may result in stealing from your financial future. These agreements are also often written where the bank can change the terms of the loan or the loan amount with little notice. However, this debt may also be a convenient way for investing in a business or other assets. Good debt verses bad debt should be understood.
As these loans are based on the value of your home, caution should be taken if home values were to fall. HELOCs often max out at 65% of the home value whereas traditional mortgages will lend up to 80% of the value of a home – both requiring qualification based on income. A decrease in the value of home prices (a potential result of interest rate increases) could see immediate consequences or surprises on term renewals.
Debt can be used effectively to acquire a home, invest in a business or generate income. However unproductive debt may also result from consumer activities such as shopping and vacations and may take the form of both HELOC or credit card debt. Credit card debt should not be allowed to accumulate over time as it is often the highest interest rate to borrow at. This underlines the prudent advice to not carry credit card debt. Credit card debt is also one of the most difficult to manage and climb out of.
With the changing trend in interest rates after a significant time – consumer appeasement towards debt will need to change. Borrowing will become more expensive and additional reflection should be taken towards incurring such commitments. There are positive aspects to debt and access to financing is important to develop a community. A well thought out plan to repay any debt should be in place and reviewed regularly.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.