Interest Rates Are Rising In Canada: Should You Be Concerned?

Interest rates have risen slowly over the last 6 months in Canada. If You Have Debt, Should You Worry? First, if the debt you have is a credit card or private debt that carries a high interest rate (20% or more), it is likely that changes in the interest rate will not affect you. For other types of debt, it depends on what it is.

There are two stages to analyzing this.

Internship 1- My budget

For fixed rate debt, the rate is fixed and will not be affected by a rate increase from the Bank of Canada, yet. When you go to renew or negotiate your next mortgage term, you may notice that the rate range you are receiving is higher. How does this affect you? A higher interest rate means a higher monthly payment. There is a possibility of having a lower outstanding balance on your debt since the terms were last negotiated. This may mean that the net effect is not significant to you, or perhaps the lower savings initially outweighs the higher interest component in paying off your debt.

If you have variable rate debt, the increase would take effect almost instantly, meaning your next payment will be higher. The next thing to do is look at your budget and see if a higher mortgage or debt payment will mean a shortage of cash for other expenses. Can this shortage be covered with cash in another account or source? If so, the net effect will not affect you significantly, but the budget will have to be changed to allow for a larger interest component in paying off your debt. If this is a problem, the impact should be noted to see how large an increase can be tolerated before there is a cash shortage that cannot be covered.

Stage 2 – The housing market

What if you are fine in your personal situation, but are concerned that the housing market will decline and affect the value of your home? The first question to ask yourself is: Why are you living at home? The next question is: How long do you plan to live in your house? Keep in mind that even if you are debt-free but have an interest in future house prices, this type of analysis will still be relevant to you. If you bought your house to live in for a long time and you are not worried about daily fluctuations in price, then there are no worries. If you bought the house to live in but also rented part of it, the rental market can be affected by the price of the house, as rent and home ownership are competitors for people looking to live somewhere . The more expensive a house becomes, the more people will be looking to rent. Assuming the supply of rentals does not change, this means a higher demand for rental units and probably higher rental rates. Higher interest rates will make housing more expensive, and as a result, rent will also become more expensive. If there are rent controls and prices can’t go much higher, you will have a better choice of tenants and less free time as there will be more demand for your rental unit. If you buy your home and rent the entire property and don’t live in it, the same type of analysis applies.

Sell ​​your home for cash

What if you lived in your house and expected to sell it and use the extra money? This question has many aspects. If you are selling your home and using it as a retirement fund or money reserve to do something else, what is that something else? If you are downsizing and buying another smaller house in the same area, it probably won’t make a big impact, except that the smaller house would be cheaper to operate. If you are selling a home and buying a townhome or condo, the price dynamics between a home or a condo will differ slightly depending on where the buying demand is coming from. If a certain area has many tenants, condos can have an advantage, as they can be rented more easily. This would mean that condo prices would drop less than house prices or rise more in a recovery. If the demand for housing comes from young families, smaller houses may be in higher demand, meaning that houses would decline more slowly and rise faster in a recovery. Why is this important? The price difference between various types of homes will change depending on what demographics or dynamics are relevant in a given area. This price difference is where the extra money would be available.

Another possibility is when you sell your house, where will you live next? If you are renting and do not intend to buy another home, you can invest this cash and home prices will affect the amount of cash you will receive, but may not affect your overall intention. If you are selling a house and paying a large debt against the house, when to sell will be more important as the cost of debt will increase with higher interest rates, while the price of the house may go down due to more people being unable to pay. to maintain their homes.

Living somewhere else

If you decide to sell and buy back in another city, the price difference will be key in determining how much extra money this movement will generate. Most people are supposed to sell the most expensive city and buy in the cheapest area, but the reverse can also be true. This can happen if people need to move to a more expensive area for work or personal reasons.

There is also the element of selling your home and moving out of the country, which has more variables like tax implications, currency valuation, and lifestyle changes that may not have to be considered within the same country.

Forced sale

Lastly, what if the timing of the sale is not up to you? This would happen in the event of foreclosure. The purpose of this article is to learn about your options before this happens. If conditions change quickly, this may be something to deal with if you can’t make payments quite suddenly, or if house prices are dropping and you have a large percentage of debt on your home. This may mean that your home equity becomes zero or negative, and the lender expects you to continue to pay your mortgage payments to prevent the lender from suffering a loss on your investment. This can also mean bankruptcy for you, the borrower, if you decide to give up the home and walk away from the obligation. This is the worst case scenario, as there are other factors at play besides whether or not the home will be sold. There will be problems with future credit, lifestyle, spending habits, or where you live and work.

These 2 stages need to be analyzed together, with Stage 1 being the most important for short-term expenses and Stage 2 being the most important for significant or long-term changes to your home environment.