Alison on Money
Higher interest rates are an opportunity to tackle debt
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What every consumer has been waiting for — and either dreading or celebrating — has finally happened. Mark Carney, Governor of the Bank of Canada, has flung open the door on interest rate hikes.
A rate increase, on its own, would also strengthen the loonie. Just witness what happened last week when Carney simply ruminated on higher interest rates — the loonie promptly shot up a cent.
And that’s not desirable for most Canadian businesses, especially manufacturers.
However, Carney is clearly thinking about some kind of intervention such as quantitative easing (a.k.a. printing money) to devalue the dollar, allowing him to boost rates and cool the ferocious record borrowing of Canadians.
Since we might face a raise in rates as early as the fall and almost certainly by the end of the year, everyone with debt should embark on a protective strategy.
Live the increase
Among the most vulnerable to the interest rate hikes are those with large personal or home equity lines of credit. Those rates will rise in tandem with the prime rate.
Use an online calculator and add half to three-quarters of a per cent to your LOC rate. Then pay the higher monthly amount.
If rates don’t rise you’re ahead. If they do you are prepared. And if you can’t make the extra payment you need to re-visit your budget and find something to cut.
In a higher interest rate environment, the last thing you want to face is an unexpected expense and be forced to pay it with a credit card. Emergency savings are critical, especially for families. Even setting aside an extra $50 each month will help.
Whether it’s a new smartphone, e-reader, car or wardrobe you hanker for, put off all unnecessary expenses — especially if you have non-mortgage debt hanging around. It’s easy to cloak our wants as needs, so delay spending on those non-essential items.
Consider your mortgage
Rising rates send many homeowners scurrying to switch from variable to fixed.
But there’s no hurry. Rates have to jump by the difference between variable and fixed before you are actually paying more.