In the one-year period from May 2022 to May 2023, interest rates more than doubled. The prime rate (an average of the best rates of major commercial banks) rose from 3.2% to 6.7% while the underlying Bank of Canada overnight lending rate rose from 1% to 4.5%.
The effect on Canadian homeowners has been significant. Imagine a family makes monthly payments on a $300,000 variable rate mortgage with a 25-year amortization. At 3.2%, the monthly payment would be $1,450, but at 6.7%, the monthly payment becomes $2,046—a difference of $596 each month.
This is a dramatic increase in a short period of time, but the interest rate itself is not particularly high—in fact, it’s fairly average. From 1935 to the present, the prime lending rate has been above 5% for roughly half of the time (WOWA 2023). Of course, there have been ups and downs. The most extreme was on August 1, 1981, when the prime lending rate soared to 22.75%.
Until recently, borrowers enjoyed exceptionally low interest rates. In 2008/2009, the U.S. banking crisis sent ripples around the world. In Canada, rates dropped to their lowest point ever; the prime crashed to 2.25% with the Bank of Canada’s overnight lending rate at just 0.25% (WOWA 2023). COVID caused similar lows beginning in the spring of 2020.
Less than two years later, inflation caught most people by surprise. The Russian attack on Ukraine sent oil and gas prices soaring, which only worsened another phenomenon: during the COVID pandemic reduced production, supply chain problems, and unexpectedly strong consumer demand pushed up prices.
To prevent runaway prices and a return to the extremes of the 1980s, governments used the main tool available to them: they raised the lending rates to slow economic growth.
Considering this brief history, it’s likely that current rates are here to stay for a while. What can you do to cope?
1. List your debts
Your list may include payments on a mortgage, car loan, student loan, credit cards, taxes you owe, retailer plans (e.g., buy now, pay later), unpaid utilities, etc.
2. Review your budget
Write down how much income you and your family generate then compare it to your spending and debts. This gives you a clearer understanding of your financial situation.
3. Pay off high-interest debts
Credit card interest is notoriously high. Consider this example: if you owe just $1,000 on a credit card with a 29% interest rate and you make the minimum monthly payment of $10, it will take you 21 years plus five months to pay it off, and it will cost you a whopping $3,114.37 in interest (Government of Canada, 2023). 4. Consolidate debts
Consolidate high-interest debts into a loan with a lower interest rate.
5. Improve your credit score
Paying your bills on time is important to your credit score, which helps you qualify for the best rates for a loan, mortgage, or line of credit. Even if you already have a mortgage, your score matters when it’s time to renew. For example, a mortgage with a 25-year amortization may consist of five terms of five years each.
6. Reduce non-essential spending
With just a few clicks, you can have virtually anything delivered to your doorstep. Ask yourself what is essential and whether you are saving enough. Small savings add up; try taking public transit instead of driving and paying for parking and bring your own beverages and food to work instead of eating out.
7. Use points
Take advantage of the points offered by credit cards to purchase essentials such as groceries.
8. Be wise with Payment Plans
When your refrigerator breaks down, you don’t have much choice about buying a new one. Some major retailers offer discounts and a deferred payment plan when you sign up for their credit card; this can be beneficial only if you make payments and pay off the balance on time otherwise, their fees are exorbitant.
9. Be conservative
Lenders make money on interest so they like borrowers to accept the most they can possibly manage. Do not accept a higher spending limit on credit cards and lines of credit and take your smallest, manageable mortgage amount. Use a mortgage calculator to see how much goes to principal and interest from year to year.
10. Increase income
Pursue ways to earn more (e.g., rent out a room or suite, sell items, take extra work).
These steps can help you save thousands of dollars and bring you closer to a debt-free lifestyle.
Sources
WOWA. Accessed May 2023. “Prime Rate and Bank of Canada Overnight Rate (1935 - 2023).” https://wowa.ca/banks/prime-rates-canada.
Government of Canada. Date modified: 2023-01-13. “Making a plan to be debt-free.” https://www.canada.ca/en/financial-consumer-agency/services/debt/plan-debt-free.html.
Government of Canada. Date modified:2023-03-23. “Credit Card Payment Calculator.” https://itools-ioutils.fcac-acfc.gc.ca/CCPC-CPCC/CCPCCalc-CPCCCalc-eng.aspx.
Government of Canada. Date modified: 2022-11-29. “Managing your money when interest rates rise.” https://www.canada.ca/en/financial-consumer-agency/services/interest-rates-rise.html.