How Can Canadian Homeowners Manage Rising Interest Rates?

If you’re a homeowner with a mortgage, all of this news about rising interest rates is probably causing your heart to beat faster these days. Especially if you have a variable rate mortgage.

You’ve worked hard. You’ve saved. You’ve likely calculated your mortgage payments based on what you can afford, with a little bit extra beyond the necessities. Add rising food and gas costs on top of this, and you’re bound to find your paycheque is being stretched to the limits.

Is it the end of the world? No.  

Will you need to take another look at your mortgage arrangement and budgeting? It may be a good idea.

To help, here are some tips to help homeowners budget smarter in a time of rising interest rates.

But first, how did we get here?

 

Rising interest rates: An explainer

The main culprit behind all of this is inflation. If it’s not brought under control, inflation means bad news for everyone – and our economy.

Inflation is when we see runaway costs on just about everything. When consumers have easy access to money there is more demand for things like houses, vehicles, and vacations. This causes prices to go up due to limited supply. When it hits a tipping point, you get inflation.

A proven strategy for fighting inflation is to curb consumer spending. One way is for the Bank of Canada to increase the benchmark interest rate, which all banks follow. The theory is, that by making it harder for people to borrow money, higher interest rates will reduce spending.

 

Why it may be time to switch to a fixed-rate mortgage

Over the past decade or so, interest rates were at record lows. They tended to either go down or remain flat. This is why homeowners were encouraged to go with variable-rate mortgages – typically a point or two below a fixed-rate mortgage. Depending on the day, they can either rise or fall.

While the rate is slightly higher, the advantage of a fixed-rate mortgage is that it protects you when rates start to climb. By locking into a set rate for say 5-years, you are buying predictability.

With economists expecting additional rate hikes this summer, it may be a good time to consider looking into a fixed-rate mortgage. If you don’t, you might soon see your variable rate mortgage is higher than if you switched to a fixed mortgage today.

You can do this by talking to your bank. There’s one important caveat… you will need to re-qualify for a fixed-rate mortgage. For those whose finances are stretched to the limit, this may pose a challenge.

 

The secret to managing costs

According to Barry Nykyforuk, President of BNA Debt Solutions, rising interest rates will only add to today’s high cost of living. People will need to be smarter with their money.

“Something has to give. The dad in me wants to advise people to cut back on discretionary spending.” He said this includes less ordering in, putting off that Mexican vacation, and reducing the daily lattes, and says it is something most people will figure out for themselves.

“My biggest piece of advice is that if you can’t pay for something with money you have in the bank, don’t put it on your credit card or line of credit unless you can quickly repay it.

“It can tip the scale from getting by to getting in over your head.”

He shared the following areas where homeowners can reduce expenditures.

 

Where can you cut costs around the home?

Hold Off on Development & Renovations

As a homeowner, there are things you NEED TO DO… like fixing a leaking roof. Then there are things you’d LIKE TO DO… finish a basement or garage, buy new furniture, renovate a room, or landscape the yard. With borrowing costs going up, it’s probably a good idea to put off big projects unless they’re essential. That basement isn’t going anywhere.

 

Managing Utility Costs

It’s amazing how much money you can save by turning down the temperature on your thermostat and turning off the lights when you’re not home. A programmable thermostat can help. With high utility costs, now might be a good time to lock in these rates to ensure a predictable monthly payment as well.

Also, be leery of spending money to save money. It may take you a couple of years to recoup the costs of buying a more efficient furnace.

Driving Down Transportation Costs

Not everyone has the option of taking public transit. If you can, you may be able to save some money. Or see if you can get a couple more years out of your vehicle.

A Marketplace investigation revealed that for most vehicles, there is no difference between using regular gas instead of premium.

For those with flexible workplaces, negotiating a hybrid work-from-home schedule with your manager can reduce costs for gas, parking, and even insurance!

Eat Well, Pay Less

While it’s convenient to pick up the phone to get dinner delivered to your door, picking just one or two nights a week to dine out or order in will save you a bundle!

Don’t cook? Now is a great time to learn! With all of the amazing online recipes and YouTube videos out there, you can quickly become a master.

Also, take a look at your grocery list. Can you get by with cheaper options? Is there a less expensive place to shop? What about bulk deals? These are all things worth exploring.

Have a Rainy Day Fund

If you can, setting aside a small amount each month (even $50) can make a big difference to cover an unexpected cost like a home or vehicle repair.

Make a plan, stick to it

So, what can you do to avoid being swallowed by debt as interest rates rise?

If you are already feeling the crunch of rising interest rates and are borrowing more money than you have coming in, rethink your budget now before things get further out of hand.

“The ostrich approach – burying your head in the sand and hoping that the problem goes away – doesn’t work,” said Nykyforuk.

By making a plan, protecting yourself, and holding on through the tough times, you will put yourself in a better position to weather the storm.

 

“Don’t put it on your credit card or line of credit unless you can quickly repay. (This) can tip the scale from getting by to getting in over your head.”