Interest Rates Are Rising in Canada – Should You Be Concerned?


Interest rates have been slowly rising over the last six months in Canada. If you have debts, should you worry? First of all, if your debt is a credit card or a private debt that bears a high interest rate (20% or more), the interest rate changes will have probably no impact on this problem. For other types of debt, it depends on what it is.

There are 2 steps in examining this.

Step 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 – not yet. When you renew or negotiate the next term of your mortgage, you may notice that the range of rates you receive is greater. How does it affect you? A higher interest rate means a higher monthly payment. There is the possible trade-off with a smaller outstanding balance on your debt since the last time the conditions were negotiated. This may mean that the net effect is not significant to you or that the savings realized on a lower principle are offset by the higher interest component on the payment of your debt.

If you have variable rate debt, the increase will take effect almost instantly, which means that your next payment will be higher. The next thing to do is to review your budget and see if a mortgage payment or higher debt will result in a lack of cash for other expenses. Can this shortage be covered in cash on another account or source? If so, the net effect will not affect you significantly, but the budget will need to be shifted to allow for a greater interest component of your debt. If this is a problem, the impact should be noted to see how much an increase can be tolerated before a cash shortage can be met.

Step 2 – The housing market

What happens if your personal situation suits you, but you fear that the housing market will deteriorate and affect the value of your home? The first question to ask is: why do you live at home? The next question is: How long do you plan to live in your house? Note that even if you have no debt, but you have an interest in the future of housing prices, this type of analysis will interest you. If you bought your home to live for a long time and do not worry about daily price fluctuations, there is no problem. If you bought the house to live in it but rent a part of it, the rental market may be affected by the price of housing because renting and home ownership are competitors for people looking to live somewhere. The more expensive a house becomes, the more people will seek to rent. Assuming that the rental offer does not change, this means higher demand for rental units and probably higher rental rates. Higher interest rates will make housing more expensive and, as a result, rental will also become more expensive. If rents are controlled and prices can not be much higher, you will have a better choice of tenants and a shorter term of vacancy, as the demand for your rental housing will increase. If you buy your house and rent the entire property without living there, the same type of analysis is applied.

Sell ​​your house for money

And if you lived at home and hope to sell it and use the extra money? This question has many aspects. If you sell your house and use it as a retirement fund or as a cash reserve to do something else, what is it? If you downsize and buy another smaller house in the same area, you will probably have no significant impact, if it is that operating a smaller house would cost cheaper. If you sell a house and buy a townhouse or condominium, the dynamics of prices from one house to the other will be slightly different depending on the origin of the purchase request. If a certain area has many tenants, condominiums may have an advantage as they can be rented more easily. This would mean that condominium prices would fall less than house prices or increase more quickly in the event of a recovery. If the demand for housing comes from younger families, smaller homes may be more sought after, which would mean that homes would fall more slowly and increase more quickly in the event of a recovery. Why is it important? The price difference between different types of housing will change according to the demographics or dynamics relevant to a given region. This price difference is where the extra money would be made available.

Another possibility is to sell your house. Where do you live next? If you rent a house and do not intend to buy another house, you can invest that money and the price of housing will affect the amount of money you receive, but it will not affect your overall goal. If you are selling a house and you are paying off a large debt, the sale will be all the more important as the cost of debt will increase with higher interest rates, while the price of the house may rise. lower because more people can not afford to keep their homes.

Live in another place

If you decide to sell and redeem in another city, the difference in price will be decisive for the amount of additional cash generated by this move. It is assumed that most people sell the most expensive city and buy in the cheapest area, but the opposite can also be true. This can happen if people have to move to a more expensive area for business or personal reasons.

There is also selling your home and leaving the country, which has more variables such as tax implications, currency valuation and lifestyle changes than it is. maybe not necessary to take into account in the same country.

Forced sale

Finally, what happens if the moment chosen for the sale does not belong to you? This would happen in case of lock. The purpose of this article is to know the options before that happens. If conditions change quickly, it can be difficult to cope with these problems if you can not make the payments fairly abruptly, or if house prices go down and you have a high percentage of debt in your home. This can mean that the equity in the house is zero or negative and the lender hopes that you will continue to pay the mortgage payments to prevent the lender taking a loss on his investment. This can also mean the bankruptcy of the borrower if you decide to abandon the house and release yourself from the obligation. This is the worst case scenario because there are other factors at play whether the sale of the house occurs or not. There will be problems with credit, lifestyle, consumer habits or where you live and work.

These two steps should be considered together, with step 1 being more important for short-term expenses and step 2 more important for long-term or significant changes to your home environment.

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