Canadians are stressed about rising interest rates. Here’s what you can do

The Bank of Canada’s aggressive interest rate hikes are not only a concern for economists and homeowners, as a recent survey shows the uncertainty of rising rates is driving Canadians’ financial anxiety to new highs.

But experts say there are steps you can take to lessen the burden as debt becomes more expensive and mortgage costs surge.

The central bank delivered a 50-basis-point increase to its policy rate on Wednesday, another oversized step and the sixth straight hike this year, marking one of the fastest rate-tightening cycles in its history.

The bank raises interest rates to increase the cost of borrowing and dampen spending demand in an effort to take some steam out of the economy and cool inflation, which remains well above its two per cent target.

Bank of Canada Governor Tiff Macklem conceded Wednesday in a press conference that higher interest rates do contribute to the burden Canadians are facing with high inflation.

While he hinted that the end to rate hikes might be on the horizon, he was clear that rates are not yet where they need to be — the risk of not raising them high enough, he said, could be a more painful option in the long run.

“We know adjusting to higher rates is difficult for many Canadians. We are watching that impact very closely. But unfortunately there is no easy out to restoring price stability,” Macklem said.

“If we don’t do enough, Canadians will continue to endure the hardship of higher inflation.”

The anxiety around rising rates has hit new highs in MNP’s regular sentiment survey on Canadians financial situations.

The debt insolvency firm’s polling, conducted in early September by Ipsos, showed earlier this week that six in 10 Canadians (59 per cent) are worried about the impact of rising interest rates on their finances. That’s up one percentage point from last quarter’s survey.

MNP President Grant Bazian tells Global News that’s the highest level of anxiety about rates since the survey began in 2017, though he noted that’s not necessarily a surprise, as rates have largely been low for its existence.

But he also says that for many young Canadians entering a rising rate cycle for the first time as they attempt to establish their households and careers, that concern is brand new.

“They’re not sure as to how this is going to affect their lifestyle, their spending habits, what they can afford for the future and their savings. I think just a lot of anxiety and the unknown, that is the key issue here,” Bazian says.

He adds that younger Canadians are most likely to make up two groups that expressed the most concern about rising rates: renters and low-income households.

The survey showed 59 per cent of renters are afraid they’ll be in financial trouble as interest rates rise, compared with 41 per cent of homeowners.

Some 60 per cent of Canadians with a household income of less than $40,000 say they feel concerned about repaying their debts compared to 51-52 per cent of those who make more.

Rising interest rates make debt such as credit cards and certain loans and mortgage products more expensive to carry.

While renters might not have a mortgage to worry about, Bazian says the sentiment survey captures a lack of security and control over their own finances. Households that rent can be subject to sudden increases in payments if they have to move or don’t have rent control, he notes.

“I think it’s just the anxiety around not being able to control what your rent is going to be.”

As the rental market booms, the costs to carry a mortgage in Canada is also ballooning.

Statistics Canada’s mortgage interest cost index was up 8.3 per cent in September, marking the third consecutive month the barometer has climbed year-over-year.

While fixed-rate mortgage holders feel the pain of higher rates when they renew, variable products see payments rise immediately in lockstep with the Bank of Canada’s rates.

An analysis from comparator site rates.ca showed that variable-rate products would pay an extra $28 monthly per $100,000 of their mortgage with every 50-basis-point step like Canadians saw Wednesday.

A homeowner renewing their mortgage today will see an average increase of 18 per cent on their monthly payments, according to the site.

Victor Tran, a mortgage broker and expert with rates.ca, tells Global News that while most of his variable-rate clients saw these increases to their payments coming, few expected such a significant increase in the past eight months.

For those feeling “tapped out” by growing payments, they will have no choice but to lock-in at a fixed rate, he says.

“There potentially will be another rate hike in December, maybe early next year – we don’t know yet. But if you feel like you are at the max budget, you may want to consider locking into a fixed rate just for long term certainty,” he says.

For those who can stomach a bit more short-term pain, though, Tran likes the flexibility offered by variable rates. The penalty to break a variable mortgage is always three-months interest, while fixed rates can have much more costly fees associated with an early exit.

He also notes that, historically, the average variable-rate mortgage ends up being less expensive than their fixed-rate counterparts.

“As long as you’re comfortable with a little bit of risk, variable rate could still be worthwhile for some people,” Tran argues.

He says he’s been getting more calls and emails than usual from clients, especially since September’s rate hike, but he estimates that three-quarters are sticking to their variable rates even as interest rates rise.

Bazian worries that Canadians struggling to make ends meet will turn to more debt as a way to manage the dual pressure of inflation and higher interest rates.

“This is where the cycle comes in, the snowball effect, because if they get more debt, that debt will typically have more interest because you’re likely going to put it on credit cards or lines of credit,” he says.

“If those interest rates go up, they’re going to be in a more difficult situation. And it can snowball.”

Whether you’re trying to fit ballooning mortgage costs into your household finances or looking for ways to eke out a few more dollars each month, Bazian says a budget is always the right starting place.

“A lot of people don’t know what they’re spending their money on. They typically know how much money they’re making, right, because that check comes in once, twice a month. But what are they actually spending on?” he says.

Breaking down annual spends such as car insurance and even holiday shopping into monthly chunks can make regular costs more digestible, Bazian argues, and can reveal where there’s space to cut back or switch to a cheaper provider or grocery store.

Almost a year into surging inflation and interest rates, he notes that many Canadians may have already cut back everything they can.

If debt costs are getting out of control, he recommends talking to insolvency trustees just to get a sense of the options out there for reducing or eliminating debt.

“The options may not be palatable, but at least individuals know that there is something they can do … when they don’t know the options, they get more anxious. Talk to a debt professional and then at least they know what will happen.”

— with files from Global News’ Anne Gaviola