Last week, the banks raised their fixed mortgage rates and there is a growing consensus that the Bank of Canada may raise their interest rate within a couple of months (the Bank of Canada interest rate determines the big banks’ Prime rate—the rate that lines of credit and variable rate mortgages are based on). If interest rates do begin to rise, then what can you do to protect yourself? Here is a list of tips consider:
1. Be careful with deferred payment plans
If you choose to buy now and pay later, you may have to pay a higher interest rate or make larger payments when the payments finally begin. If you chose to take advantage of a deferred payment plan, make sure that you can afford higher payments than what’s advertised. Advertising is based on today’s interest rates, not tomorrow’s. If you’re not careful, a deferred payment plan could turn into buy now, pain later.
2. Pay off your debt as quickly as you can
With interest rates still near historic lows, one of the smartest things you can do is pay off your debt as quickly as you can. The more debt you can pay down now, the less painful higher interest rates will be for you later.
3. Make sure you have a balanced budget
If you spend more than you earn, you’ll likely be financing your lifestyle at higher interest rates in the near future. Life will only become that much more expensive as rates rise. You’ll only be working against yourself if you try to apply any of these 7 tips without balancing your budget first. For budgeting tips, click here.
4. Make sure that your mortgage payments are affordable
If you can barely afford your mortgage payments right now, what will you do when your payments increase? As interest rates begin to rise, you will likely be renewing your mortgage at a higher rate. This may be several years down the road, but can you afford a higher mortgage payment? If you can’t, start planning now so that your lender doesn’t make the decision for you.
5. Generate income with your home
Since a home is most people's biggest asset, see if it can generate some income to help get you by. You may be able to rent a room to a student or offer your storage space for rent. If you have a 2 bedroom apartment and don't need the second parking spot it comes with—but the guy down the road needs a spot to park his motorcycle, rent the space to him for extra cash. That little bit extra might be just enough to help you make do.
6. Lock your mortgage interest rate in for many years
If you believe that mortgage rates may rise substantially, now would be a great time to consider locking in your mortgage for a good number of years. Interest rates are still near historic lows. If rates do rise, this could be one of the best moves you could make. Speak to someone you trust and decide what will work best for you.
7. Lock in a low interest rate for debt that you can’t afford to pay off quickly
If you are carrying a significant line of credit balance or if you have credit cards or loans that you don’t think you will be able to pay off any time soon, now may be a great time to consider locking in those debts at a lower interest rate. Consider changing your revolving forms of credit into pay-down loans and get rid of the debt. This option isn’t ideal for everyone, but it may work for you if you need to reign in your temptation spending.
The bottom line is quite simple – look out for your bottom line with a balanced budget that gets you away from the never-never plan.