Canadians are living through an uncommon period of rapidly rising interest rates. In an effort to control inflation, the Bank of Canada has boosted its key interest rate 10 times since March 2022.
The result? A central bank rate that was slashed to a miniscule 0.25 per cent during the COVID-19 pandemic has climbed to 5.00 per cent, higher than it’s been in more than two decades.
Plus, with inflation targets remaining stubbornly out of reach, the Bank of Canada has hinted that more rate increases may still lie ahead, even though it decided against one in September.
With their budgets already stretched thin by inflation’s impact on the price of consumer goods and other costs, some Canadians now face a double whammy of financial pain as they deal with the increased cost of borrowing money, whether it’s for a mortgage, line of credit, loan payments, or credit card debt.
However, there are some simple strategies to help you handle the effect of higher interest rates. Here are five things you can do to lessen the blow of interest-rate pain.
1. Update your budget to account for increased payments and…
If you’re paying off a variable-rate mortgage or loan and your interest rate has gone up, it’s costing you more to deal with that debt these days. To fully understand the impact of the increase, re-work your budget to account for any boosted loan or mortgage payments, and see where it’s leaving you. Are you still able to pay the rest of your monthly bills and meet savings goals? If so, great. If not, it’s time to get to work on the second part of your budget exercise.
1a. …look for ways to trim your spending
If interest-rate hikes have put a hole in your budget, you’ll need to find a way to plug the leak. Examine your spending and look for things that can be cut down or eliminated entirely. This often means making some tough choices, whether it’s doing away with restaurant meals or cutting back on costly hobbies and travel. Some sacrifices may be necessary to ensure you can focus on the next important strategy.
2. Make paying down debt a priority, especially high-interest debt
If you’ve got variable-rate loans or credit card debt, you can’t avoid the impact of higher interest rates. Make a plan to pay off your debts as soon as you possibly can – wiping out debt is like making a long-term investment in your own financial health and stability.
Tackle the debt with the highest interest rate first, then keep working your way through them from highest to lowest. Credit card interest rates are particularly punitive, so don’t allow debt to build up there. Lower-rate debts, such as mortgages, don’t always need to be handled so aggressively.
If you can find a favourable interest rate by doing so, consider consolidating your high-interest debt (such as credit card debt) to get a better handle on repayment terms.
3. Consider switching to a fixed-rate mortgage
You’ll typically have to pay a penalty to adjust the terms of your mortgage, but there may be instances where such a switch ends up paying for itself through decreased interest costs. A fixed-rate mortgage offers certainty and security, helping you keep a better handle on your housing costs. If you’re up for negotiating a new deal, make sure to give the next strategy a try, too.
4. Ask your lender for a lower rate
Especially if your mortgage is coming up for renewal, there’s no harm in dealing directly with your lender and trying to negotiate a better interest rate than the one you’re being offered. In some cases, a lender would rather keep your business than lose you to a competitor, even if it means earning slightly less from lending you money. Contact your lender on the phone, or set up an in-person appointment to discuss your rate. Make sure you’ve done some research in advance to identify the best available rates from other local lenders and ask your lender whether they’re willing to match someone else’s deal.
5. Look for ways to increase your income
In some instances, a reasonable response to rising interest rates is taking on more work to increase your income. That could mean picking up additional shifts at your current job or pursuing a part-time position or some kind of side-hustle.
Of course, increased interest rates also offer savers the opportunity to earn a little bit more on their money. If you’ve got some emergency savings stashed away, look for a high-interest account to put your money in or consider investing in a GIC while interest rates are high. Even though interest rates may not be above current inflation rates, locking into a two-year or five-year GIC could secure you a solid, sustained period of guaranteed investment income on your cash savings.