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

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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.

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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. 

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