Interest rate hike good time to take stock of personal debt

If you have variable mortgage, may want to switch to fixed

The Bank of Canada’s first key interest rate hike in seven years, announced last Wednesday, will be catching the attention of residents across B.C.’s Lower Mainland, where sky-high housing prices and a growing cost of living contribute to increased levels of personal debt.

David Yan, vice-president of wealth management at Metro Vancouver-based Envision Financial, a division of First West Credit Union, says that while the news should prompt British Columbians to take stock of their financial futures and plan accordingly, there’s no need for panic.

“A rate increase of 0.25 per cent is not by itself cause for concern with most people,” says Yan. “To keep things in perspective, the cost of borrowing money is still extraordinarily low at the moment.”

The question, says Yan, is whether Wednesday’s rate hike signals the beginning of a trend that would see additional rate increases in the months ahead.

“We’ve known for some time now that the rock-bottom interest rates of recent years wouldn’t stay that low forever and many economists are now speculating that the Bank of Canada may announce another small increase before the end of the year,” he says. “Now is definitely the time to re-examine your overall financial situation with the help of a trusted financial advisor,” recommends Yan.

With the possibility of borrowing costs continuing to inch up incrementally, Yan advises to focus on paying down debts with variable interest rates, to assess the way their current liabilities are structured and to exercise good judgement when it comes to taking on new debt.

“If you’ve got a variable interest rate—be it in a line of credit, student loan, car loan or other—you may find it to your advantage to pay it down or restructure to a fixed rate while rates are still so low,” he says. “If you’re planning a major purchase like a home, a renovation or a new vehicle this year, you’ll want to double check that you still qualify for the amount you plan to borrow if interest rates continue to rise.”

Yan also points out that the interest rate hike may have an upside—particularly for savers, pensioners and investors.

“Increased interest rates and a strengthening Canadian economy typically creates opportunities for better returns on deposits and investments,” he says.