June 5, 2023

Canadians are stressed about rising interest rates. Here’s what you can do – National | Globalnews.ca

Aggressive rate hikes by the Bank of Canada aren’t the only concern for economists and homeowners, as according to a recent study, the uncertainty of rising interest rates is driving Canadians’ financial anxiety to new records.

But experts say you can ease the burden as debt becomes more expensive and mortgage costs rise.

The central bank raised its key interest rate by 50 basis points on Wednesday, the second outsized step and the sixth consecutive hike this year, one of the fastest rate-tightening cycles in its history.

The bank is raising interest rates to raise borrowing costs and dampen consumer demand in an effort to get some momentum out of the economy and cool inflation, which remains well above the 2 percent target.

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Bank of Canada Governor Tiff Macklem admitted at a press conference on Wednesday that higher interest rates will add to the burden of high inflation on Canadians.

Although he hinted that the end of rate hikes may be in sight, he was clear that rates are not yet where they should be – the risk of not raising them high enough, he said, could be a more painful option in the long run. run.

“We know that adjusting to higher prices is difficult for many Canadians. We are monitoring this impact very closely. But unfortunately, restoring price stability will not be easy,” Macklem said.

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

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Renters, low-income and young Canadians weighed in on prices

Concerns about rising interest rates have reached new highs in MNP’s regular survey of Canadians’ financial situation.

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An insolvency firm poll by Ipsos in early September showed earlier this week that six in 10 Canadians (59 per cent) are concerned about the impact of rising interest rates on their finances. It is one percentage point more than in the last quarter’s survey.

MNP President Grant Bazian tells Global News that’s the highest price-related concern since the survey began in 2017, though he noted that’s not necessarily a surprise since prices have largely been low during its existence.

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

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“They are not sure how this will affect their lifestyle, their spending habits, what they can afford for the future and their savings. I think just anxiety and unfamiliarity is the key here,” says Bazian.

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

The survey showed that 59 percent of renters are afraid of getting into financial difficulties when interest rates rise, compared to 41 percent of homeowners.

About 60 percent of Canadians with household incomes of less than $40,000 say they worry about paying back their debt, compared to 51 to 52 percent of those who earn more.

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

While renters may not have a mortgage to worry about, Bazian says the poll shows a lack of security and control over their own finances. Households who rent can be subject to sudden payment increases if they have to move or if the rent is not under control, he points out.

“I think it’s just the anxiety of not being able to control your rent.”

Mortgage holders see a payment balloon

As the rental market rises, mortgage costs also rise in Canada.

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Statistics Finland’s mortgage interest cost index rose by 8.3 percent in September, which is the third month in a row that the barometer has risen from the previous year.

Holders of fixed-rate mortgages feel the pain of renewing higher interest rates, but payments on variable products rise immediately with Bank of Canada rates.

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An analysis by rates.ca, a comparison website, showed that variable-rate products would cost an extra $28 a month for every $100,000 in mortgages for every 50-basis-point increment, as Canadians saw Wednesday.

A homeowner who renews their mortgage today will see their monthly payments increase by an average of 18 percent, according to the site.

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

He says for those who feel they are being “dumped” by rising fees, they will have no choice but to lock in a fixed rate.

“In December, maybe at the beginning of next year, it will be possible to raise the interest rate – we don’t know yet. But if you feel like you’ve maxed out your budget, you might want to consider locking in a fixed rate just to be on the safe side for the long term, he says.

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For those who can stomach a little more short-term pain, however, Tran likes the flexibility that variable rates offer. The penalty for breaching a variable rate mortgage is always three months’ interest, while fixed rates can have much more expensive fees associated with early exit.

He also notes that historically, average variable rate mortgages have been cheaper than fixed rate mortgages.

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

He says he’s received more calls and emails from customers than usual, especially since the rate hike in September, but he estimates that three-quarters will stick with their variable rates even as rates rise.

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Higher mortgage rates affect Canadian homeowners

Avoiding the “snowball” of mounting debt

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

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“That’s where the cycle comes in, the snowball effect, because if they get more debt, that debt tends to have more interest because you’re probably going to put it on a credit card or line of credit,” he says.

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

Whether you’re trying to fit mortgage expenses into your household finances or looking for ways to make a few extra dollars each month, Bazian says a budget is always the right place to start.

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“Many people don’t know where they spend their money. They usually know how much money they’re making because the check comes once, twice a month. But what are they really spending on?” he says.

Breaking down annual expenses like car insurance and even holiday shopping into monthly chunks can make regular expenses more manageable, Bazian claims, revealing where there’s room to cut back or switch to a cheaper supplier or grocery store.

Almost a year after inflation and rising interest rates, he notes, many Canadians may have already cut back on everything they can.

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If the cost of debt is getting out of hand, he recommends talking to insolvency practitioners just to get an idea of ​​options for reducing or eliminating the debt.

“The options may not be palatable, but at least individuals know they can do something…when they don’t know the options, they are more anxious. Talk to a debt professional and they will at least know what’s going on.”

— With files from Global News’ Anne Gaviola

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