How to manage the impact of interest rate hikes on your budget

Many Canadians are struggling with the impact of high inflation on their budget. You may be charging more of your expenses to credit to keep afloat in this high-cost environment — however, the Bank of Canada recently increased its overnight rate to five percent. This interest rate hike will make the cost of debt more expensive and could have a significant impact on your personal finances.

Let’s take a look at how interest rate hikes will affect borrowers, lenders, and investors — and how you can manage the impact of increased interest rates on your budget.

How do interest rate hikes affect my finances?

Rising interest rates will impact borrowers, lenders, and investors in different ways:

Borrowers

Interest rate hikes may affect your credit cards, home equity loans, vehicle loans, student loans, lines of credit, and home mortgages if you are a borrower. High interest rates mean you will have to pay more for borrowing money — and loans with a variable interest rate rather than a fixed rate will be affected the most.

A variable interest rate means the interest charged on a loan will change based on a benchmark such as the Bank of Canada’s overnight rate. A fixed interest rate means the interest charged on a loan will remain the same over the lifetime of the loan.

Imagine someone bought their home at a variable interest rate in 2020 when interest rates were much lower. The interest rate hikes will increase their monthly mortgage payment if they didn’t lock in a fixed rate. High interest rates will also impact homeowners with mortgages up for renewal by increasing their monthly payments. Additionally, if you have a line of credit with variable rate terms, you will also see an increase in your monthly payments.

Lenders

You are a lender if you have bank deposits, bonds, or other investments. Fluctuating interest rates may have the opposite impact on a lender as opposed to a borrower. If you have a variable rate on these types of investments, an interest rate hike may increase your earnings. However, you may not receive the benefits of increased interest rates if you have locked in a fixed rate on these investments.

Investors

Investors may also feel the negative impact of high interest rates. If you have investments in real estate, for example, you may experience an increase in carrying costs if the financing you have in place is at a variable rate. There may also be a decline in the purchasing market because high interest rates make it more difficult to qualify for borrowing.

How to manage the impact of high interest rates on your budget

More than 52 percent of Canadians are $200 or less away from being able to meet their financial obligations at the end of the month according to the latest MNP Consumer Debt Index. Interest rate hikes will have a negative impact on those who are already struggling to balance the increase in daily expenses against their monthly income.

An increase to a single monthly payment such as a mortgage or line of credit can have a significant impact on your overall financial wellbeing. If you are struggling, we have several recommendations to help you manage the burden of high interest rates on your personal finances:

1. Review your budget — Look for expenses that can be reduced or curbed to make room for the increase in living expenses and debt payments.
2. Talk to your financial institution — Your financial institution may offer payment arrangements to make your situation more manageable.
3. Speak to an insolvency professional about your options — Licensed Insolvency Trustees (LITs) are the only federally legislated debt professionals who can help you explore all your debt relief options, including Consumer Proposals and Bankruptcy.

These recommendations may help reduce the impact of interest rate hikes on your budget in the current economic environment. However, if you are struggling with debt and are no longer able to meet your financial obligations, it may be helpful to contact an LIT to explore your debt relief options.

Get the right advice

It’s important not to ignore the signs that your financial health may not be as healthy as you would like it to be. Recognize what you can do to help manage the impact of high inflation and rising interest rates on your budget — but also be sure to acknowledge what is out of your control.

Reach out for help if you are feeling overwhelmed by debt or financial stress. Our LITs support people in situations just like yours every day — and we can provide the advice you need to take control of your financial future. We’ll help you explore your debt solutions and support you on every step of your journey toward a fresh financial start.