Rising interest rates worry Canadians already struggling to get by

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Looming interest rate hikes have Canadians increasingly worried about making ends meet, according to an Ipsos survey commissioned for insolvency firm MNP Ltd.

The Bank of Canada sent strong signals last month that the days of rock-bottom interest rates tied to the COVID-19 pandemic were over. With Canada’s annual rate of inflation hitting 5.1 per cent last month — a more than 30-year high — most economists are expecting the central bank’s key overnight rate will rise steadily over the course of the year, starting as early as its next announcement on March 2.

The outlook is worrying many Canadians, who are already grappling with surging prices at gas pumps and grocery stores, according to the MNP survey.

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More than half (55 per cent) of Canadians surveyed said they are concerned about the impact of rising interest rates on their finances, according to the survey, a rise of three percentage points from a similar survey conducted about the prospect of rate hikes last September.

Some 54 per cent of respondents said they’re more concerned about their finances than they used to be.

Meanwhile, 81 per cent said they’ll be more careful spending money as interest rates rise. But perhaps surprisingly, one in four also said they don’t have a solid grasp of how rising rates would affect their finances.

“That was one of the indicators that came out of the survey that shocked me a little bit. I didn’t think it was going to be quite that high,” Grant Bazian, president of MNP Ltd. in Vancouver, told Global News.

He attributes the relatively high uncertainty around the effects of interest rates on the younger generation who haven’t seen rates rise in their lifetimes.

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But as members of this younger cohort increasingly enter their prime earning years, and subsequently get exposed to the housing market and take on debts, he says it’s a topic they should get familiar with quickly.

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“If you have a line of credit or variable interest rate mortgage, you should be concerned,” Bazian says.

Who gets hit when interest rates rise?

In the simplest terms, rising interest rates make borrowing more expensive.

This is especially concerning for Canadians, with the average household debt rising to $1.77 per dollar of income in late 2021 — some of the highest levels of debt per household among other western nations.

Those with variable-rate mortgages or certain types of debt, such as a home equity line of credit, will immediately see their rates rise when the Bank of Canada raises its key lending rates.

This increases the burden of paying down those debts, and can force difficult decisions for Canadians.

Speaking to Global News last month before the central bank’s latest interest rate announcement, personal finance expert Rubina Ahmed-Haq said rising rates have a knock-on effect when it comes to balancing a family’s pocketbook.

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“All of a sudden you’re paying $300 more to service your debt, and that’s $300 that you then can’t put into your retirement savings, your kid’s education plan or spend on yourself to make you happy,” she says.

“And so that’s when people have to start making lifestyle choices as well. Should I be driving two cars? Should I be going out for dinner once a week? Should I be cutting back on my entertainment? That’s when people have to start looking at other ways that they can cut back.”

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Bazian notes that most of MNP’s insolvency clients fall below the $60,000 threshold of household income, as rising costs are often compounded with unavoidable expenses like sudden medical bills or other obligations.

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But, he notes, overwhelming debt levels can hit any income bracket, noting MNP works with doctors, lawyers, bankers and more.

“There’s no one group that’s immune from this. Everyone runs into financial problems. If you make $500,000 a year, you can still overspend. And people do,” Bazian says.

How to brace for interest rate hikes

With life set to become even more expensive for many Canadian households, financial experts say there are a few concrete steps you can take to prepare for rising interest rates.

First, avoid taking on new debt if possible and pay down as much of your existing obligations as you can to minimize the impact of higher rates, Ahmed-Haq suggests.

“If you have the ability to pay some debt down, that’s going to make you feel a little bit better when interest rates go up because you have a smaller amount of debt that’s being affected by that higher interest rates,” she says.

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Sometimes, families do need a bit of extra credit to get by. Bazian suggests only taking on new loans for the haves, and avoiding spending on the wants during the dry times.

“If you need a vehicle to go to work, if you need to repair a leaky roof in your house and you don’t have the money, that credit makes sense,” he says, adding that you should first understand the terms of the interest and then pay it down as soon as you’re able.

If financial stress isn’t easily solved by monthly budgeting, there are other tools out there to support Canadians with a significant debt burden.

Some households could be eligible for debt consolidation, which can see a number of credit lines folded into a single loan, often with a more manageable accumulated rate, Bazian says.

Insolvency, though it still carries a stigma in some circles, can be a path to relief as well, he notes.

Bazian praises Canada’s insolvency legislation as a stand-out among other western nations and encourages Canadians not to discount the option, especially if it’s recommended by debt professionals.

“I think a lot of people have concerns and angst about what the future holds for them,” he says.

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“And I always think talking to debt professionals is the first step to ease your mind. You don’t have to go bankrupt, you don’t have to do a proposal. But if you’re worried about your situation, these are the options for you.”

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