Canadians worry about growing interest rates. How can you ease the financial pain?

The central bank’s aggressive interest rate increases are not only a point of concern for economists and homeowners. The latest poll shows that the uncertainty around higher rates is causing record high level of financial anxiety for Canadians.

However, there are certain ways to ease the pain as debt becomes more expensive and mortgage costs go up.

As you know, the Bank of Canada raised its key lending rate by 0.5% on Wednesday, marking the sixth rate increase in a row this year. This rate-tightening cycle is one of the most aggressive in history.

The BoC raises rates in order to increase the cost of borrowing and reduce spending demand in attempt to take some steam out of the economy and restrain inflation, which still exceeds the target 2% significantly.

On Wednesday, the Bank’s Governor Tiff Macklem admitted that higher interest rates increase the burden Canadians are facing with high inflation.

Although he hinted that the end to rate increases is somewhere near, he still made it quite clear that we’re not there yet. According to him, the risk of not raising them high enough could be more painful in the long term.

“We know it’s difficult for many Canadians to adjust to higher rates. We are watching his influence very closely. However, unfortunately there’s no easy way to restore the necessary price stability,” – Macklem noted.

“If we don’t do enough, Canadians will keep suffering from higher inflation.”

The anxiety around growing rates has reached new highs in MNP’s sentiment poll on Canadians financial situations.

The debt survey was conducted in early September by Ipsos. The results show that 59% Canadians are worried about the influence of growing interest rates on their finances. It’s 1% more than in the previous quarter.

MNP President Grant Bazian says it’s the highest level of anxiety about interest rates since the poll began in 2017. At the same time, he adds that it could be not that surprising, as rates have remained mostly low during the period of its existence.

However, Bazian also noted that for many young Canadians entering a growing rate cycle for the first time in their lives while they try to establish their households and careers, it’s an absolutely new type of concern.

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

According to the poll, 59% of renters are afraid they’ll face financial problems because of rate hikes, while in case of homeowners, the number is only 41%.

Approximately 60% of Canadians with a household income of less than $40,000 worry about repaying their debts compared to 51-52% in case of those with a higher income.

Growing interest rates make credit cards and certain loans and mortgage products more expensive to handle.

Although renters may not have a mortgage to worry about, Bazian says the survey points to a lack of security and control over their finances. Renters can face sudden increases in payments if they need to move or don’t have rent control.

“In my opinion, it’s just the anxiety about not being able to control what your rent could be in the future.”

As the rental market faces strong activity, the costs to carry a mortgage is also going up sharply.

Statistics Canada’s mortgage interest cost index rose by 8.3% in September, marking the third annual hike in a row.

Fixed-rate mortgage holders face the pain of higher rates when they need to renew. Meanwhile, variable products see payments go up right when the BoC raises its overnight rate.

Variable-rate products see the payments grow by $28 monthly per $100,000 of a mortgage with every 0.5% rate hike – just like the one we’ve seen on Wednesday.

A homeowner renewing their mortgage today will face an average monthly payment rise by 18%.

Most variable-rate holders knew the increases were coming, but few predicted such a sharp gain over the previous eight months.

Those who can handle a short-term pain, decide to stay with variable rates due to their flexibility. The penalty to break a variable mortgage is usually only three-months interest, but fixed rates can cost you much more if you decide to exit earlier. Moreover, during the most common five years mortgage term there is a high probability that rates and payments will go down if you continue to fluctuate with Prime, but if you convert into fixed you must break the mortgage in order to get lower rate.

From historical point of view, the average variable-rate mortgage us usually less expensive than a fixed-rate one in the long run.

Even though most of our variable clients decided to fluctuate with Prime rate, some of them considering conversion into fixed. Good strategy for that group would be to take shorter than 5 years fixed rates if their mortgage allows them to do so. This option is only available if you have less than 2-3 or 4 years left on your mortgage term. In this case you can ask your bank to provide a quote for 2-3 or 4 years fixed product and if during this term rates will go down you renew into better rate and won’t have to pay high interest for the full 5 years. Same is true for the borrowers whose mortgage is up for renewal soon – consider shorter than 5 years products, you might be able to enjoy lower rates at the next renewal earlier!

MNP President Grant Bazian worries that Canadians facing strong financial problems will increase their debts in attempt to handle the double pressure of inflation and higher interest rates.

“This is where the snowball effect starts. If they get more debt, it will usually have more interest as you’re more likely going to put it on credit cards or lines of credit,” – he adds.

Before tapping into high interest debts, we suggest homeowners to explore all options associated with secured equity lending. We have some unique solutions and ideas from our lenders partners on how to use interest only mortgages and home equity lines of credit to navigate through the high interest rates environment and lower monthly payments.