My Loans Cost So Much More Now. What Should I Do?

Many Borrowers Are Going to See Payments Rise in Lockstep

All of this could have meaningful implications for Canadian consumers. These consecutive overnight rate hikes by the Central Bank have pushed up the cost of borrowing for financial institutions. In turn, banks and other lenders have passed on the higher cost to their customers, putting additional pressure on financially burdened Canadians.

This means the cost of credit cards, personal loans, lines of credit, and mortgages may continue to tick higher, making it more difficult for people who want to pay down debt, renew their mortgages, remodel their kitchens, or put in that backyard pool.

With lending rates climbing, consumers across the country are looking at higher borrowing costs and amplified interest expenses. Higher mortgage rates translate to increased monthly payments for homeowners and decreased affordability for prospective homebuyers.

From variable-rate loans to personal loans and lines of credit, most forms of consumer loans are closely tethered to the BoC’s rate moves. Let’s look at these four common forms of debt in some detail:

• Mortgages
• Consumer Loans
• Car Loans
• Credit Card Debt

1. Mortgages, Especially Variable Mortgages, Are Already Rapidly Rising

Variable-rate mortgages move in lock step with the overnight rate. Any increase in the latter will inevitably push up the variable mortgage rate and, consequently, monthly payments.

While fixed-rate mortgage tends to track the bond market, homeowners may feel the impact of higher interest rates at the time of renewal. Monthly payments for fixed-rate mortgage may increase as the mortgage is renewed at a higher current rate.

For illustrative purposes, here’s how a fixed-rate mortgage that has an original balance of $400,000 and a monthly payment of $1,893 based on an interest rate of 3% may change.

At renewal, if the fixed mortgage interest rate is 5.5% for a 5-year term, the monthly payment will go up from $1,893 to $2,340 - an increase of $447 due to a higher interest rate at renewal.

What Can You Do?

If you have a variable-rate mortgage, you may want to consider switching to a fixed-rate mortgage to lock in a lower interest rate for a longer term. This will give you more certainty and stability in your monthly payments and protect you from further rate hikes.

Borrowers must, however, factor in any applicable fees or penalties for breaking their current mortgage contract. It would be prudent to consult a mortgage broker or a financial advisor to help you decide which option is best for you.

2. Consumer Loans Are More Expensive Now

Canadians with variable-rate loans, such as personal loans, lines of credit, or HELOC should be prepared to pay higher interest costs. According to aggregator website rates.ca, the rate for an uninsured HELOC is currently around 6.95%.  That’s a significant rise from the low rates of 2020.

What Can You Do?

It is crucial to reassess your needs and affordability if you are planning to take out a loan to fund a purchase or a reno project. As well, review existing loan terms and consider refinancing options, if necessary.

3. Car loans

Any change in the overnight interest rate will automatically impact interest charged on auto loans. While car loans in Canada have fixed rates, and monthly payments remain unchanged throughout the loan term, if it is refinanced or renegotiated, monthly payments could jump when interest rates climb.

What Can You Do?

Those who are budgeting for a new car may want to do some additional number crunching to account for potentially higher interest rates on their car loans. Per Statistics Canada, the average car loan interest rate in Canada has nearly doubled from about 4% in 2021 to just under 8% this year.

4. The Most Expensive Debt of All: Credit Cards

Interest charged by credit card issuers follow benchmark rates. Which means you have to pay more, even as you’re bombarded with new offers. Plus, as Morningstar behavioural researchers have found, credit card companies cater their marketing to exploit the biases to which different groups are subject. For example, less-educated individuals received credit card offers that more aggressively shrouded bad features (like high default APRs, high late fees, or high over-limit fees) via the positioning of the information, the font size, or the complexity of the content, because credit card companies expect these individuals to be more prone to present bias, which is our tendency to overweigh present payoffs versus those of the future, even if the future payoffs are greater.

What Can You Do?

As interest rates rise, consumers carrying credit card debt should consider paying down the balance in full or look into transferring balances to lower-rate options. Plus, as Morningstar behavioural researcher Samantha Lamas says, preparation is key, and we can make ourselves aware of situations where our behavioural biases may take their toll, especially with credit cards.

The Good News: Better Yields and Income

Higher interest rates are not all bad news, though. Rising interest rates are beneficial for savers and investors who enjoyhigher interest rates on savings accounts and fixed-income investments. When the Bank of Canada raises its key rate, it often results in banks offering higher interest rates on deposits. This accelerates savings growth as higher yields can amplify returns.

Fluctuations in the prime rate have a direct impact on the interest earned from high-interest savings accounts and other investment options such as guaranteed investment certificates (GICs). As the overnight rate rises, individuals can boost their savings with higher interest rates.

Rising interest rates, in conjunction with other factors, can affect the performance of stocks and bonds. Investors may want to evaluate and rebalance their portfolios to realign with the interest rate outlook and financial goals.

What Should You Do Right Now? Review Your Budget

Given the wide ranging and significant effects of rising interest rates on consumers’ finances, individuals may want to review their budget and determine how much extra they will have to fork out on their existing or upcoming debt.

To offset the financial impact of increased debt expenses, you may need to take some budgetary steps including cutting back on some discretionary spending, such as dining out, entertainment or a beach vacation. You may also want to lock-in lower interest on your existing loans, where possible.

Another way to counterbalance elevated cost of living is to look for ways to boost your income by taking on a side hustle, asking for better compensation or selling some unwanted articles around the house.