What to do about your debt and mortgages after the interest rate hike

TORONTO — Many consumers will soon find their debt loads heavier now that Canada’s central bank and the country’s biggest commercial lenders have raised their benchmark rates by one-quarter percentage point.

The country’s biggest banks raised their prime rates after the Bank of Canad hiked its overnight lending rate Wednesday by a quarter of a percentage point to 1.25 per cent.

It’s a challenge for Canadians still struggling to cope with the record amounts of consumer debt they amassed after the 2008 financial crisis because lenders use their prime rate as a benchmark for setting some other short-term rates including variable-rate mortgages and lines of credit. A hike is good news for savers as the prime rate also affects interest rates for savings accounts.

If you’re contemplating how to best take advantage of the increased rates or avoid falling into further debt, personal finance expert and Ryerson University business professor Laleh Samarbakhsh shared her advice.

Q: Now that the rate has gone up, what financial choices should I be making?

A: With the interest rate increase, debt becomes more and more expensive. Before you do anything, you have to understand what kind of debt you have to start with.

We have good types of debt and bad types. Good types can include any investment that is made to contribute to progressing your future. For example, a student loan is a good type of loan because you are investing in your ability to make more money. At the same time, debt you have from real estate or your primary residence is considered a good type of debt because you’re accumulating equity.

Focus first on what is considered bad debt like credit card debt, lines of credit or any kind of debt with higher interest rates and no future investment. Pay off the debt with the higher interest rate first, but also consider what debt you have that is tax deductible.

Q: If I have some money in a Tax-Free Savings Account, but also some debt, should I pull out that money in the account and pay off the debt?

A: A lot of times people might consider borrowing from a lower debt to cover a higher debt or borrowing from a TFSA to make a payment. My recommendation is if you have some tax deductibility because of debt you have, keep it. As much as paying off debt is important, if you won’t be able to pay off all your debt, you can use the deductibility you have from some to save on taxes and create an income to pay off the high-interest or bad debt.

We have had a successful year on the investing market, so if an individual makes contributions to their TFSA and has a portfolio with a higher return of 20 per cent or 25 per cent, it makes sense to keep that because the advantage is no tax being paid in the TFSA.

Q: What should I do if I have been looking at buying a home or if I just bought a home and am dealing with a mortgage?

A: For individuals who care about their credit score and are applying for a mortgage shortly, consider your credit limit. The types of debt that have a credit limit should be paid off first to release your capacity.

The typical concerns after a hike are usually individuals with mortgages because those are the biggest debts people carry. My advice would be for individuals with variable mortgage rates to consider locking down a fixed mortgage rate.

Q: What should I do if I have no debt, but want to take advantage of the hike?

A: Saving is making even more sense now because savings accounts will have fairly higher interest rates, so if you have no debt, my recommendation is to start with capping your Registered Education Savings Plan contributions first because that brings you tax savings.

Once the RESPs are capped, I would also invest in a Tax-Free Savings Account. The interest you make is tax-free, so I recommend maximizing your TFSA contribution.

After that, there are lots of forums and markets for investment and you can consult with your financial adviser about what is best to invest in at the time.

Q: Some economists think we might see further interest rate hikes later this year. Should I act on those rumours now?

A: It’s hard to predict what is going to happen, but we know the decade of low interest rates are over. It’s important to be more careful with spending and what kind of debt we are taking on and how and what the plan for repaying it is.

If you’re concerned, take action sooner rather than later and don’t let it bring mental pressure to your daily life.

This interview has been edited and condensed for clarity and length.

Just Posted

Biathlon women sweep the podium for second time

Biathlon women took top four spots in Thursday’s 10-km race

Red Deer firefighter is recovering, thanks community for support

Firefighters who help together, stick together. Red Deer firefighter medic Ben Barthel… Continue reading

Petroleum producers speak to Red Deer & District Chamber of Commerce

Canadian Association of Petroleum Producers brings recommendations

Science fair is around the corner

Central Alberta Rotary Science Fair happens March 29 and 30.

Ponoka host to Bayer Crop Science seed innovations trade show

The company held a trade show with seed crop science industry partners at the ag event centre

Gaudreau snaps goal drought to help Flames double up Islanders 4-2

CALGARY — The drought is over for Johnny Gaudreau. Gaudreau’s first goal… Continue reading

Federal government set to develop code of conduct for sport in Canada

OTTAWA — The federal government is developing a code of conduct for… Continue reading

Jay Baruchel has trained the dragon, now he’s letting go with ‘The Hidden World’

TORONTO — The first time actor Jay Baruchel stepped into a recording… Continue reading

Hockey ref says AC/DC support is giving him motivation in Alzheimer’s fundraiser

Enthusiastic AC/DC fan Steve McNeil says he’s feeling inspired to push even… Continue reading

Gardening: What are you planting in 2019?

What’s new in plants for 2019? Checking catalogues, greenhouses and stores will… Continue reading

Opinion: I spy another energy hypocrite

Talk about biting the hand that feeds you. The mittens provided to… Continue reading

Canada’s bobsleigh team races World Cup on Calgary home track facing closure

CALGARY — Canada’s skeleton and bobsled teams will race a World Cup… Continue reading

Most Read