Where Will Rising Interest Rates Hurt Most?
Mar 21 2022 0
Mar 21 2022 0

Rising inflation combined with a strengthening post-pandemic economy gives both reason and opportunity for the Bank of Canada (BOC) to raise interest rates aggressively in 2022. The 0.25% increase to its benchmark overnight rate in early March likely went unnoticed by most of us. However, it could be that interest rates are 1% or even 2% higher by this time next year, and that would definitely not go unnoticed! Don’t forget that the BOC dropped rates by a whopping 1% in just a few weeks at the height of the pandemic in March of 2020.
 
One common point of misunderstanding about variable rate loans is their basis on the prime rate. The prime rate is currently 2.2% higher than the BOC overnight rate and is determined by the major banks. Although the rates are much different, the key takeaway is the prime rate moves in lockstep with any changes to the BOC rate, usually within a few days. 
 
Now that we have the background knowledge out of the way, just how will future BOC rate hikes affect your debt? 
 
1. Variable rate mortgages 
The percentage of Canadians holding a variable rate mortgage surged in 2021 and now stands at about 50%. Any rise in the BOC rate is met by an equal rise in variable rate mortgages, so the impact is almost immediate. If rates rise 1% over the next year, a $500K mortgage payment will increase by over $200 month. 
 
2. Home Equity Line of Credit (HELOC) 
HELOCs usually have a variable interest rate that will rise in conjunction with any BOC rate hikes. A $100,000 balance carried on your HELOC will cost you about $20 more each month for every 0.25% increase by the BOC, so you could easily be looking at an extra $100 monthly a year from now. 
 
3. Credit card debt 
Credit cards have fixed interest rates, and you would have to dig into your card-holder agreement to see the details of how the rate can be changed. However, credit card rates are already so astronomically high that it is unlikely you would even notice a 1% increase! Our advice is to attack any outstanding credit card balance ASAP. Paying the minimum each month is futile and only keeps your creditors at bay. It requires over 10 years of minimum payments to eliminate a $1000 balance (at 20%) and will cost you another $1000 in interest charges! 
 
4. Personal lines of credit 
There are fixed and variable rate options out there. If you selected the lower variable rate when you signed the agreement, expect to pay more going forward on any outstanding balance. 
 
5. Car loans 
Car loans can be either fixed, variable, or sometimes have a combination where they change to a variable rate after a few years. You will need to check your loan agreement for any variable interest portion to see if your payment is going up…. in addition to those skyrocketing gas prices! 
 
6. Student loans 
The default choice for Government of Canada student loans is variable interest "at prime" with a fixed rate option at "prime + 2%". The point is mute right now as interest charges are currently suspended, but variable rate student loan holders will see a significantly higher payment when interest charges resume in April of 2023.


The bad news is that you will likely be paying more interest as we move through 2022, but the silver lining is that you will become more aware of just how much your debt is costing you. Not all debt is bad, but the cost of your debt can vary greatly, so make sure you understand your interest expense and adjust your repayment priorities accordingly.



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