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What Do Rising Interest Rates Mean If You're Already in Debt?

Like most Canadians, you’ve probably incurred debt at some point in your life to cover a major expense. Did you know the Bank of Canada’s (BOC) aggressive interest rate hikes can impact the interest you pay on this debt?

For the economy, rising interest rates are meant to curb inflation, which is now at a 31-year high of 6.8 per cent. However, on an individual level, rising interest rates can increase your monthly debt payments, making them harder to afford. Here’s what you need to know to be well prepared.


What Debt Do You Need to Worry About?

The type of debt affected most by rising interest rates is variable-rate debt, which has a fluctuating interest rate. This is because the interest rate for variable-rate loans is calculated using the prime rate, which is heavily influenced by the BOC’s policy interest rate. Consequently, if the BOC raises the policy interest rate overnight, the prime rate increases, affecting your variable-rate loan.


This mainly includes debt like mortgages, lines of credit and student loans. A hike in interest rates means a larger portion of your payment is being allocated to interest, costing you more over the course of the loan, thereby increasing the amount of time it takes you to pay it off.  


Fortunately, fixed-rate mortgages aren’t impacted by rising interest rates. However, your rate may increase when your mortgage is up for renewal.


How To Prepare for High Interest Rates

Here are a few things you can do to prepare yourself for rising interest rates:

  • Minimize high-interest debt. Pay down as much of your high-interest debt as possible, such as credit card debt. This will create room in your budget to absorb additional costs caused by rising interest rates.

  • Reduce your expenses where possible. The cost of living is at an all-time high. Therefore, it’s important to keep track of the money that’s coming in and going out so you can trim your budget where necessary.

  • Explore debt solutions. If you feel overwhelmed by your debt, contact a licenced insolvency trustee (LIT). They’ll analyze your situation and provide personalized debt relief options. For example, the LITs at D. & A. MacLeod Company Ltd. offer credit counselling and virtual assistance for customers who wish to file a consumer proposal.


Debt Solutions in Ottawa and Virtual Locations Throughout Ontario

If you’re worried about rising interest rates plunging you deeper into debt, the team at D. & A. MacLeod Company Ltd. can help. Our team of licenced insolvency trustees has been dedicated to your financial well-being for 70 years. Contact us today to set up a free, no-obligation consultation to discuss your situation.