Interest Rates and Inflation in Canada: Changes and Impact on Your Finances and Cash Flow

Man with symbol showing rising inflation and interest rates in Canada

Inflation is having a major impact on Canadians’ everyday lives, and people are increasingly worried about the long-term impact it will have on their finances. Inflation is the rising cost of goods and services. That puts pressure on Canadians’ budgets, and a new Angus Reid survey shows that two-in-five Canadians feel worse off in January 2022 than they were in 2021.

Inflation anxiety isn’t limited to rising prices in the face of wages that can’t keep up. At the same time that essentials are rising in price, there are worries that interest rates could start rising as well, and that can make carrying debt much more expensive.

Let’s Talk

How Does Inflation Affect Interest Rates?

High inflation is a problem for Canadians because of the pressure it puts on their budgets. In the face of rising costs, incomes don’t stretch as far as they used to. But that’s not the only concern. Forward-thinking Canadians are also worried about the effect higher inflation can have on their debt.

The Bank of Canada has a policy goal of keeping inflation under control, and the primary tool they use to control inflation is interest rates. Interest rates determine how expensive it is to carry credit. When credit is cheap, it’s easier for people and businesses to borrow money. This means more money is flowing through the economy as people buy more goods and businesses expand. It helps the economy grow, which is why we see low interest rates during recessions and throughout the pandemic, but this heightened demand for goods and services can also lead to inflation.

By making credit more expensive, the Bank of Canada is tightening the flow of new money into the economy. As credit slows down, the rate of inflation ideally slows down as well. In order to prevent inflation from speeding up in the year ahead, the Bank of Canada is likely to raise interest rates in the opinions of most observers.

The problem is that people carrying debt or looking to borrow now face higher costs for servicing their debt. Families with high household debt in Canada may face higher monthly payments on a variety of debt, including personal loans, car loans, mortgages, and lines of credit.

What Inflation and Interest Rates Mean for Your Finances

High inflation rates can change the monthly payments you have to make to service your debt. The impact of higher interest rates can hit variable rate loans right away.

The combination of higher interest rates and inflation, even if it slows, can put families in a very difficult position where they can’t keep up with their debt payments.

If you find yourself in this position, it may be time to speak with the debt professionals at David Sklar & Associates. There are debt relief options you can explore when you can no longer keep up with your payments. Sometimes your financial situation changes for reasons you can’t control. When you’re struggling, there are ways you can deal with debt that you can no longer afford.

Do Higher Interest Rates and Inflation Affect Your Credit Card Debt?

Changing interest rates have a direct impact on any variable rate debts you have. A variable rate is the prime lending rate (the rate at which the Bank of Canada lends money to the financial institutions that work with consumers) plus interest charged by the financial institution. When the prime rate rises or falls, the interest rate you pay changes as well.

Fixed-rate debts are not affected by rising interest rates until you have to renew the terms, such as on a mortgage. Most credit cards and payday loans have fixed interest rates in Canada, but some low-interest cards do come with variable rates. Home equity lines of credit (HELOCs) are usually variable, and student loans tend to have a variable component, as the prime rate is used in the federal component. When it comes to personal loans and mortgages, borrowers can often get a lower interest rate by taking a variable option, but they can quickly see higher monthly payments if the prime rate goes up.

How Inflation and Interest Rates in Canada Can Make Your Mortgage Unaffordable

When many people buy a home, they look less at the price of the property than their monthly payment. Especially in today’s world of sky-high real estate prices, homebuyers get past the sticker shock by focusing on the monthly payment.

The problem is that Bank of Canada interest hikes will lead to that number climbing higher. If you have a variable interest rate, your mortgage can change overnight, but even if it’s fixed, you can face much higher costs when you renew. Even if you had a fixed rate mortgage, most mortgages need to be renewed at least once, where the bank offers you a new rate and terms.

For thousands of Canadian homebuyers who bought property at record-high prices and record-low interest rates, the prospect of an interest rate hike can be daunting. New mortgage terms can make a big difference on your new monthly payment, and they can throw your budget into disarray if you weren’t expecting it.

A substantial interest rate hike can quickly lead to mortgage arrears, where you’re unable to keep up with your payments, and you wind up owing back payments on your mortgage. It’s a very difficult position to be in, and it jeopardizes ownership of your home.

Secured debt such as a mortgage can be harder to deal with than unsecured debts such as credit cards. With the help of a Licensed Insolvency Trustee, you can erase debts in Canada through a consumer proposal or bankruptcy, but debts with collateral cannot be included in insolvency proceedings unless you give up the asset.

How a Licensed Insolvency Trustee Can Help You Deal with Higher Interest Rates

Your mortgage is likely the largest debt you have that will be affected by higher interest rates, though Home Equity Lines of Credit and auto loans can also be affected. However, carrying other, unsecured types of debt such as credit cards or payday loans can make it harder to keep up with those payments, as your income is stretched thin and much of your payments are going to interest charges instead of the amount you initially borrowed.

By taking action on your other debts, you have a better chance of keeping up with essential payments like your mortgage. But given the options available, you should be careful about how you proceed so that you don’t end up hurting your financial future.

Debt Settlement: Why You Should be Careful

Debt settlement in Canada is one of the options you’re likely to encounter when you’re looking for ways out of debt. How debt settlement works is that you hire a debt settlement company to negotiate reduced interest rates with your creditors or even reduce the total amount you owe.

However, it comes with several major risks if your creditors choose not to negotiate. First of all, sometimes debt settlement companies collect the money you would have paid to the creditors but withhold it as a negotiating tactic. During this time, your creditors can still take actions to collect, such as wage garnishment, all while penalties continue to accumulate. Non-payments are reported to the credit bureaus, affecting your credit score, and creditors such as the Canada Revenue Agency won’t negotiate with debt settlement companies at all.

Consumer Proposal Services and Bankruptcy

As higher inflation and interest rates in Canada put pressure on your budget, it’s time to get serious about getting out of debt. When you’re not worried about debt, it’s easier to budget for higher essential costs and keep up with everything. Getting out of credit card debt will help you take back control of your finances.

When you can’t afford your debt, a consumer proposal or bankruptcy can be an expedient way to resolve the situation. In a consumer proposal, you make a monthly payment within your means which is divided between your creditors. If your creditors agree to the proposal, you can see a significant reduction in the principal that you, while also benefiting from zero interest rate charges.

Consumer proposals have become the most popular way for Canadians to seek protection through insolvency proceedings, but bankruptcy can also make sense as an alternative. The trade-off with bankruptcy is that you may have to give up non-exempt assets, with the proceeds going to your creditors. There are cases where it can make sense to opt for bankruptcy first, especially if you have few non-exempt assets.

To learn more about bankruptcy or consumer proposal services in Toronto and the GTA, book a free consultation with a Licensed Insolvency Trustee. We’ll learn about the specifics of your financial situation and work with you on the right solution for your debt. As your everyday costs get more expensive with inflation, the best way to prepare is to free up more of your income by getting debt-free as soon as possible.

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

Share This!

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on pinterest

Ready to live debt free?

Jerry is a very patient person, he answered all my questions and made this experience so smooth and easy for me. I was not sure what to expect but dealing with him made me feel so much better. He sure knows what he is doing and how to put people at ease for sure (should have done this long ago). I recommend him to anyone I am so glad I had him on my side and now to do my part. Thanks Jerry ur greatPattie
Patty Murphy
21:34 18 May 22
Rhoda Lewis helped me achieve a fresh start two and half years ago! She was very professional with a very warm, caring personality! I emailed her today with a question and she responded quickly. She's great at her chosen profession!!
Debbie Livingston
01:24 11 May 22
Nothing but good things to say about Jackie. She was so nice and so understand and everything was so quick and easy. In a matter of a week, there was the solution that I never thought was possible. Thank you so very much for everything that you have done. ❤️❤️❤️
Cassandra Keenan
21:05 10 May 22
I was in a lot of debt and stress, Jackie Stanley with David Sklar & Associates was very professional, and extremely helpful with getting out of debt. I should of did this sooner, they take the all the weight and stress of a persons shoulders, amazing team at David Sklar & Associates!!
Hubert Z
03:08 10 May 22
Jackie helped me out during a really tough time and she made the entire process very easy and painless. I highly recommend reaching out to her if you find yourself in any financial trouble. You won’t be disappointed!
prettylush 13
02:42 10 May 22
I had a good experience with Jackie. Making appointment to see her was easy and follow up was great. I appreciated the detailed information she gave and the clear explanation of the options I had. While I landed on this company without anyone's recommendation, I will be happy to recommend their services to those who need them.
Kipyego arap Serem
19:00 09 May 22
Jackie has been really helpful with my issues. She is approachable and friendly and I recommend her to anyone trying to access her services.
Ankita Sisodia
18:51 09 May 22
The service that was provided to me from Trina at David Sklar and Associates was nothing but superb! I was referred to them through family, and Trina was nothing but understanding and so so so helpful! Every part of the process was smooth and efficient and she explained everything to me so I would be able to understand the process. Can’t believe the weight that has been lifted off my shoulders. Thank you so so much Trina!
Christina Ivany
15:52 07 May 22
I’m so glad that I spoke to Rhoda. I was nervous having to claim bankruptcy, but Rhoda is very resourceful and has a wonderful way of putting you at ease. I felt like I was speaking to my best friend. Rhoda from the bottom of my heart thank you for your help and kindness it goes along way. Linda Bennett
Linda Bennett
15:29 06 May 22
I was absolutely terrified of admitting I needed help and was in a tough position where my best option was to file for bankruptcy. As someone with severe anxiety it was one of the hardest calls I had to make but once I spoke with Trina at David Sklar she immediately made me feel at ease and like I was in good hands. I mostly dealt with Trina and Eva who were so kind and communicative throughout the whole process and made it as painless as possible.I did briefly speak with a couple of other associates from time to time and they were also equally as lovely. The reviews for this company obviously say a lot about these guys and it rings true. I’m not someone who usually writes lengthy reviews but I am happy to recommend David Sklar and associates for anything. Thank you guys for always treating your clients like human beings and always being available for questions or concerns.
Emma Higgins
19:14 02 May 22