Interest rate hike: 4 ways Canadians should prepare
The Bank of Canada is expected at some point in the year to hike interest rates, and even a small and gradual hike would affect millions of Canadians with car loans, mortgages and lines of credit. How should you prepare?
1. Pay down debt
People get a false sense that they shouldn't be in a rush to pay down debt quicker when interest rates are low. Analysts advise against that, saying consumers should focus on paying down your debt aggressively while more of your payment goes towards principal. Reducing the principal amount will help protect you against future rate increases, reducing the amount of interest you'll be paying.
2. Lock in mortgage or line of credit rates
Those who have a floating-rate mortgage or loan (variable mortgages for example) should consider locking in their rate when rates begin to rise. It's unlikely that you'll be seeing low rates again anytime soon once they begin to rise, thus locking in your rate will secure you with a lower rate for the foreseeable future.
3. Don't rush to buy a home
Higher interest rates may lead to a correction in the housing industry. It is common for people to panic when rates begin to rise, as they all want to purchase a home while rates stay low. In reality, they risk a chance that their home may drop in value. Be vigilant about any big purchases and consider using a higher interest rate in your future budgeting to ensure you are in a strong financial position when tempted to make any big financial decisions.
4. Sell the house?
Canadians may have overextended themselves in their homes, resulting in limited wiggle room in the event of a potential financial emergency (such as a rate hike). This can lead homeowners facing a very difficult decision: Should they sell the home? Perhaps downsizing to something more affordable will help you keep a preferred lifestyle and allow you to own a piece of real estate.