Image: File photo.
Don’t ignore this week’s interest rate hikes, a Kelowna bankruptcy trustee is warning, it’s the wrong time to be adding debt.
Darrin Surminsky said instead you should be doing all you can to repay what you’ve borrowed, because the days of “free money” are quickly disappearing.
“It’s clear that the trend is now increasing the prime interest rate and increasing the cost of debt,” Surminsky told Okanagan Edge.
On Wednesday, the Bank of Canada raised its prime lending rate 25 basis points to 1.0 per cent. It was the second hike since July after leaving it untouched for seven years.
Banks use that benchmark to set interest rates for mortgages, loans, credit cards, and lines of credit.
While you might not think it will impact you today, Surminsky said it will compound quickly. He predicts people will notice changes a few months from now—especially right after Christmas.
“I’m trying to be the canary in the coal mine,” said Surminsky, a licensed insolvency trustee with MNP Ltd. in Kelowna.
For those in the Okanagan with $500,000 variable-rate mortgages, for example, the latest increase would mean an extra $135 per month.
If you’re already spending upwards of 40 per cent of your income on your home—a situation many in the Valley are faced with—you might need to seriously address your debt.
Furthermore, Surminsky said, there are suggestions the prime rate will continue to climb as Canada’s economy continues to charge ahead.
It wouldn’t be unrealistic to expect a return to six per cent variable-rate mortgages, Surminsky said, something we haven’t seen since 2007.
Given that recent survey results revealed half of Canadians are living paycheque to paycheque is the reason he’s sounding alarm bells now.
“That’s what makes this environment so scary,” he said.
To help you take charge of your finances, Surminsky has compiled an action plan.
- Start with some simple calculations and set a budget: Compare monthly disposable income to monthly debt payments, and ensure that if interest rates continue to climb, there will still be funds available to pay off those debts, including any new debts. Take a look at your total spending for the last year to create a budget for next year at higher interest rates.
- Focus on paying down the principal now: Despite the low interest rates for years, many haven’t worked away at their debts. But with the threat of more rate increases to come, it’s time to focus on paying down principal. By paying a lump sum on the principal on debts now, the interest payments in the future can be lower, even if rates do rise.
- Pull back on big ticket purchases: In recent years many Okanagan residents have taken advantage of low interest rates purchasing cars, appliances, furniture and more on credit. Anyone with this kind of debt will be vulnerable to rate hikes. It’s time to pull back on big ticket purchases and any kind of spending on credit.
- Lock in at a low interest rate: Low rates are good news to new home buyers, and those on floating rate mortgages, but with rates now trending upward, consumers should consider locking in now.
- Seek professional advice: Start creating a realistic plan to deal with debt by seeking professional advice. This will not only help resolve financial difficulties sooner, but it will make the process less stressful. If you are using credit to pay for basic expenses or to service other debts, it’s a sign you need help right away. Seek advice from reputable sources.
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