By Jasmin Brown

BDO Debt Solutions

Rising Interest Rates and Inflation

Jul 27, 2022 | 8:26 AM

“The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of Pattison Media and this site.”

The Bank of Canada recently raised its key lending rate by a full percentage point to 2.5% – the largest single one-time increase in over twenty years. The rise in interest rates coupled with soaring inflation is putting a lot of strain on household budgets. Wages are not keeping up, so people continue to experience a decline in purchasing power. More and more people are relying on credit to make ends meet, and the increase in interest rates means that it costs more to borrow and to service debt. The polls are showing us that people are feeling overwhelmed, that they are being outpaced by the increasing cost of living, and that they would be unprepared for unexpected expenses.

Variable Rate Credit Facilities

The people that will be affected the most are those with variable rate credit facilities. That means home equity lines of credit (“HELOC”), lines of credit, and variable rate mortgage holders. Those with a HELOC or line of credit will experience an immediate increase to their monthly payment. That may also be the case for a variable rate mortgage, although for some variable rate mortgage holders, the monthly payment won’t increase, but more of the payment would be allocated to interest and less to principal. This will have the impact of taking longer to pay off the mortgage.

The Financial Tipping Point

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We are in the perfect storm when it comes to financial difficulty – high interest rates and soaring inflation, while emerging from a worldwide pandemic. Surveys are showing us that many Canadians are just a few hundred dollars away from reaching their financial tipping point. The increase in payments resulting from the rise in interest rates pushes people closer to that tipping point. On top of that, we are all paying more for pretty much everything. Almost everyone you talk to brings up the rising cost of living, whether it be gas or groceries, and people are having to make hard financial choices. Needless to say, as people reach their financial tipping point, it can be a constant source of fear and anxiety. Ignoring the problem instead of taking steps to change the situation will not help you move forward.

Advice for Managing Increasing Interest Rates and Inflation

Now is not a good time to increase your debt. Now is the time to slowdown, step back, and assess your current situation. Here are some things that you can do:

· Stress test your debt – determine how much your payments will increase with the increase in interest rate. The Financial Consumer Agency of Canada website provides good information.

· Calculate your debt to income ratio – divide your monthly debt obligations by your monthly income. If the amount is greater than 40%, it could be a sign that it is time to ask for help.

· Consider the warning signs of financial difficulty

· Review your household budget and debt repayment plan using these online tools

If rising interest rates and soaring inflation are stressing you out, you are not alone. The polls are showing us that many Canadians are struggling. Many people experience physical symptoms when the burden of their financial situation becomes too great, and that is no way to live. If you are one of the many Canadians struggling with your financial situation, it is time to reach out for help. Making the initial call can be the most difficult part, but there are solutions available.

If you are having trouble making ends meet each month, finding the right debt solution can help. Visit the BDO Debt Solutions website for more information about bankruptcy, or call 1 855 BDO DEBT to book a free, no obligation consultation.

Jasmin Brown is a Senior Vice President overseeing the insolvency practice in Saskatchewan. She is committed to providing creative and practical debt solutions with empathy, understanding and professionalism to help people overcome their financial difficulties.