Get Ready for Higher Interest
Posted by Gail | Filed under Credit Wise
Interest rates are on their way up. The Bank of Canada has taken the cap of prime and the cost of money is heading north. If you’ve been sitting on a bunch of debt, you may have already seen interest rates inching up as lenders have complained that money is more expensive. But this makes it official, and you’re going to see even more increases over the next year.
We’ve been basking in a low interest rate beam for some time and we’ve come to take cheap money for granted. It’s been reported that Canadians are the most indebted people in the world. OMG! Our household debt is sitting at a record $1 trillion, which means we’re carrying almost a buck fifty in debt for every buck we earn. That massive debt load is about to get a lot heavier.
So what’s a body to do?
1. Get your frickin’ debt paid off. Really? I haven’t said this often enough yet? Or maybe you just didn’t believe me. So what will it take to get you to wake up and smell the coffee? If you haven’t done a debt repayment plan, you’re a dope and it’s time to haul your head out of the sand and get on the move. Go and borrow a copy of Debt-Free Forever from the library and follow the plan. It will be hard. Don’t whine. Just do it.
2. Think about locking in your mortgage. As variable rates go up, so do fixed rates. You may hang on to your lower variable rate for a while in the hope that the upward trend is an aberration only to find that when you go to lock in you can’t afford the payments. If you bought way too much house, or you’ve had a change in income, reassess whether it makes sense to lock in now and have a set payment you can manage for the new few years.
3. Negotiate and consolidate. With interest rates going up, you need to make sure you’re paying the least amount in interest. Can you consolidate to your mortgage when you’re locking in? Can you move your high-cost debt to your line of credit? And watch your student loans. With rates headed up, your payment may not automatically change, but less and less of your money will be going to actually pay down the debt. You’ll have to raise your payment amount if you want to keep making headway on that debt.
4. Higher rates can be good news for investors. Bonds and ETFs that invest in short-term bonds can boost the returns in your TFSA or your RRSP. Time to call your broker or adviser and get an update. And, finally, GICs may start earning their keep,
5. Sell your house. If you’re planning on retiring any time soon and you planned to sell your home and downsize, you might want to think about moving up the agenda on that plan. Real estate, like every other asset class, is cyclical and we’ve been on a high… which means we can’t expect the same returns we’ve seen for the past decade. It may be time to take your money and run.
Many of the people who keep tabs on interest rates expect the move by the Bank of Canada to be the first in a long series. Expect to see quarter-point, or even half-point increases, over the next couple of sessions. Some estimate that the Bank of Canada prime will hit 1% by the end of this year, and could be as high as 3% by the end of 2011.
If you’re one of the dopes who is still using credit to live beyond your means, you’re about to find out what the cost of being stupid really is.
June 7, 2010 at 7:17 am
I’m so glad we have managed to pay off our debt. Next goal will be to save up for a house, but I think we might have missed the best time to get a mortgage locked in. This was the cost of having debt for us.
regards,
Jason
June 7, 2010 at 7:18 am
I’m so glad we are in a good position with this coming up. Our mortgage is less than $100,000 and our interest rate is very good (and locked in now for another 4 years yet), and we have a car payment. That’s it! No other debt, an emergency fund, and money set aside for our fall trip. It feels so good to know this information won’t affect us like it might so many other people. I can’t believe so many have been ignoring the signs for so long. Hope they catch on quick!
June 7, 2010 at 7:38 am
Anybody who didn’t see this coming has had their head buried under a rock! Carney has been promising that the rates can’t stay that low forever. You’re right Gail, some have just not paid attention to it and don’t realize they’ll be paying more on variable rate loans, including mortgages.
My biggest loan (mortgage) is variable. Although it’s at a really low rate, I’m anxious to see how the lender will adjust their lending. Because I DO have debt (although I’m on track to retire it by end of 2010) I’m a bit anxious about increases in mortgage and line of credit interest.
Still, I know I got myself into debt, and I can bloody well get myself out! I declared to a friend recently that I would get out of debt by the end of the year, and he said “do you really think that’s possible?”.
HA!! Yes, I do, and yes I will! The hike in interest rates only increases my resolve. I have a tight cash flow because I have debt. There’s no two ways around it. No debt, and suddenly I have breathing room. I’m really looking forward to living that way!
June 7, 2010 at 8:00 am
I found this wonderful little video over the weekend called the quest for credit from mint.com
http://www.youtube.com/watch?v=WPHOQw5Zpjg
Even my husband found it funny and said they should show it in schools.
I hear ads on the radio all the time for people to quickly buy a car before the rates go up. That’s a brilliant idea, let’s get into more debt! I guess it is true that our society is based on credit.
June 7, 2010 at 8:45 am
@Brenda
We are in the same boat as you except that we have our cars paid off. I had been leasing a vehicle through my business up to a little while ago but I felt like I was throwing my money away and decided to just buy an used vehicle when the lease was up instead. So, mortgage at about 120,000, no debt (thanks to listening to Gail 2 years ago) and two paid for vehicles. I’m so glad that we paid everything off when we could – now with a healthy emergency fund, RESP and TFSA along with pensions I’m just feeling so relieved. We are even starting to pay extra on our mortgage. When I went to the bank to do that they looked at me like I was from Mars lol… they had to look up how to put extra payments against the principal as apparently its so rarely done.
The interest hikes are only going to benefit us in our savings. Thank you Gail!! Some of us are listening
June 7, 2010 at 9:22 am
I’m glad I renegotiated our mortgage early a couple months ago. I was ‘just’ inside of the permitted early negotiation dates. I got in under 4% for 5 years and it started going up the week after I signed.
June 7, 2010 at 9:22 am
Our variable mortgage went up already on friday by .25% (not a big deal – yet!). And property tax notices came in much higher this year, because they were put on hold last year for our area (maybe the whole province of BC, I’m not sure).
I do hope the credit increase starts making housing more affordable though. Prices just can’t keep going up & if people can’t actually get a mortgage maybe it will signal the end of the rise.
June 7, 2010 at 9:39 am
I’m still a year away from being consumer debt free, not from lack of trying for sure to make it earlier, but at least I have started an emergency fund and thanks to the tips from posters here, I set aside $300 as ‘unplanned-planned’ spending my last pay cheque. I hope I don’t need to dip into it, but if I do, at least I’m NOT going to have to dip into my emergency fund this month for a change. There’s nothing left to spend on this month except for Father’s Day, Anniversary, and a couple of birthdays, but they were already covered by the gifts and entertainment funds. YAY! I finally get it!
As for the mortgage, we re-signed a month or so ago at just above 4% (4.03% to be precise) for 5 years, and after I’m finally debt-free next August, we’re slapping the debt-repayment into a combination of higher emergency fund contributions and mortgage pre-payments. We’re okay with RRSPs and RESPs, not stellar or maxed out, but you know what, there’s got to be some life lived today and not totally for years from now right? I can’t wait to get my first full mortgage payment made in combination with the regular payments. How exciting (or for some, how lame that this is where I get my ‘cheap’ thrills from I guess!).
Have an awesome and one-day-closer to debt-free day all!
June 7, 2010 at 9:53 am
We were lucky with our mortgage too. We renegotiated on the first day we were eligible to do it (early) and reduced our interest rate from 4.5% to 3.75% for 5 years. We signed the papers on the Saturday and on the Monday the rates increased. It’s already making a big difference to the amount going to principal. Unfortunately we still have 15 years to go but any little bit helps.
June 7, 2010 at 10:26 am
I panicked when I checked my student loan debt this weekend and saw that the rates had gone from 4.75% to 5%. I knew that meant that interest had finally gone up! EEK! I’m trying to pay it off as soon as possible and have put $18,000 on it since last November but I just accepted a part time job (the job of my dreams) and so the payments won’t be as high, at least until my husband gets a job. Plus, I just bought a used vehicle to be able to make the commute, and I hate the thought of taking on more debt, but it was time too with our old vehicle. It’s really frustrating though cuz my debt probably won’t be paid off by the June 2011 I was hoping for (although that figure was for paying off $63000 in student loans in a year and a half – perhaps too optimistic). Frustrating!
June 7, 2010 at 10:34 am
Checked online this morning and the rate for our line of credit this morning and it’s gone from 3.25% to 3.5%. Interesting but irrelevant as there is no balance on it. Not like it was years ago. Yikes.
Our 5yr morgage isn’t up for renewal until Sept 2012 and who knows where rates will be by then. I hope to have paid down a ton by then so even if the rate is higher we’ll be renewing on a much lower amount so I expect the biweekly payment will still go down. I should look into how early we can renew without a penalty – if rates are still going up at that point we’ll want to renew as early as possible.
June 7, 2010 at 10:55 am
Jenn, a 3.5% rate on the Line of Credit, that’s still low. I am wondering if the LoC amount is secured by a GIC. Just curious, I want to compare to my Loc.
June 7, 2010 at 11:15 am
Sooo….what should we do? Our interest rate went up on Tuesday from 1.75 to 2%. (current rate is prime minus .5%) A hike of about 18 dollars. We recently paid off our LOC (finally! After YEARS of carrying it) so we have about $300 extra to save/put towards the mortgage if need be. The current fixed rate is 4.59%, which would raise our payments by about $230. Of course, we will have to renew in 3 years anyway. I keep thinking I should just hold on to our current rate until we have to renew. But who knows what the rate will be like by May of 2013. Any suggestions?
June 7, 2010 at 11:25 am
I’ve just recently purchased a house with a 3.89% interest rate for the next 5 years. I know when I go renew in 5 yrs time the rate will not be the same. For some added insurance to keep may payment at relatively the same level when I renew, I plan on doing some annual prepayments. I’ve calculated that I’ll need to put down additional approx 40K over the next 5 yrs (which is doable) to keep my payment the same if my rate goes up 2.6%
June 7, 2010 at 12:28 pm
“It’s been reported that Canadians are the most indebted people in the world.”
Really? I’m surprised that we’re leading the debt tables. What’s the source for that? (I don’t mean that as a challenge; I’m just curious.)
June 7, 2010 at 1:20 pm
Just when it feels as if everything is closing in around us, and still 24 months to go on our debt repayment, a light in this dark tunnel! I just received a promotion! Between the extra wages and no daycare payments during the summer months, I will be able to really tackle this debt! Looking at our new budget, I can triple our debt payment during the summer and then double it for the rest of the year.
What seemed like a lifetime away is now less than one year away! Debt Free Forever!!
June 7, 2010 at 1:30 pm
[...] original post here: Get Ready for Higher Interest « gailvazoxlade.com By admin | category: credit interest low rate | tags: been-reported, bigger, bit-anxious, [...]
June 7, 2010 at 2:09 pm
We are in the same boat as many others. We consolidated our debt into our mortgage, didn’t take more than we needed to, and will be mortgage free in 10 years or less. We locked our mortgage in at 4.1% for five years and figure we will be able to swing the balance irregardless of what the interest rates will be in four and a half years. We used a fair portion of our tax refund ($3,000) to make a lump sum payment on the principal and that brought us down to owing $98,000 on our mortgage. We have no more cc balances and what we do use the cc for now is for points and they are paid off each month. We have savings and an emergency fund. Hubby is almost maxed on his RSP contributions and has set up a spousal RSP for me. It sounds like a rosy pic but if you talked to me a year ago, I was a mess.
Thanks to watching Gail, reading, talking to hubby, and actually making a budget this is where we are. Thanks Gail for all your sound advice.
Donna
June 7, 2010 at 2:11 pm
I remember when I bought my first house in 1989, the interest rate was 14%, so no matter what the increase is now, I always remember those days and it keeps things in perspective. No one should ever have expected rates to stay this low, it just wasn’t feasible. Fortunately, we are debt free except for 2 small mortgages on 2 properties which only total $147K, we are in good shape for the future.
June 7, 2010 at 3:36 pm
We plan to be debt free in 2 1/2 years…at the time our locked in term is up and due for re-negotiation. We fully expect things to cost more at that time but figure with no other debt and no longer paying any or minimal daycare costs…we’ll be in a decent place and can maybe even increase our monthly payments. Hard to imagine right now but one day we’ll be decently comfortable.
June 7, 2010 at 3:50 pm
Just checked and our LOC is now 3.5%. I knew this was coming and so have been socking as much as possible onto our one and only debt. June 1st our interest was $31.45. Luckily I’ll be paying another $1,500. off this month so interest will be $26.25 July 1st (unless it goes up again of course). If the amount owed was still the same – by not making a payment – the interest would be $31.50 – more than last month.
@Ameilia – I agree – that video should be shown in high schools and colleges.
June 7, 2010 at 4:19 pm
We’ve got 4 more years to go on our locked mortgage, and no car payments… still carrying some cc debt, but we have a big light at the end of the tunnel with a loan being paid off no later than this December! For the first time in a long time, I feel like there’s that beautiful light at the end of the loooong tunnel!
June 7, 2010 at 5:24 pm
middleclassmom @ toronto, i LOVE your attitude. like you, i got myself into this mess and i will get myself out! power to you. and to mom24js, congratulations! what a gift!
interesting that canadians are the most indebted people in the world; i’d have thought that dubious title belonged entirely here in the us.
i applaud all of you who knew it was time to re-negotiate;you provide so much real-life, honest information for me to build from. i take gail’s information, read responses, and have managed to pull myself quite together in my budget & pay-off-my-debt plan. thanks for all your inspiration…i need it and use it daily!
June 7, 2010 at 5:46 pm
I have about 6 months left on my car loan (fixed at 0.9%) and when that is gone, the car payment becomes extra mortgage payments. I am on a variable rate and interest rates need to go up by 2.5% just to get back to where I started 2 years ago. I am not in a rush to lock in as I want to continue to take advantage of the lower variable rate.
I did something (which Gail would say was crazy) and I got a 40 year mortgage..when you still could..and after 6 months increased the payments to the equivalent of a 25 year mortgage. I had that plan when I got the mortgage but I followed through on implementing it.
I did this so that if I had to (loss of job, etc) I could drop my mortgage payments back but I can afford the 25 year ammortization payments and with the car to soon disappear then soon I’ll be on the 20 year payment schedule.
But like all advice on the website, the mantra always is…make a plan, stick to it and you’ll be on the road to comfortable, debt free living before you know it.
June 7, 2010 at 7:06 pm
I would think this means the US is headed for higher rates also. The plus for me is I locked in my mortgage for 30 year fixed of 4 7/8%. I find it amazing the mortgage as to be renegotiated every five years or so in Canada. As all of my debt (mortgage and student loan) is fixed I am happy for the higher interest rates. I am looking forward to making a little more money on my Emergency Fund and long term savings. I have decided to buy a “newer” car but that will have to wait until next year when I have saved enough money to give me a super low car payment. As interest rate go up I will have to evaluate the numbers again and adjust accordingly.
June 8, 2010 at 4:26 am
[...] Get Ready for Higher Interest « gailvazoxlade.com [...]
June 8, 2010 at 5:40 am
[...] This post was mentioned on Twitter by Mike Turner, 2 Cents. 2 Cents said: Get Ready for Higher Interest – http://b2l.me/zuu3u Another great wake up call on debt from Gail Vaz-Oxlade! [...]
June 8, 2010 at 9:13 am
@ Tennis Fan – technically it doesn’t have to be every 5 years. You can get a 20 year term too.
June 8, 2010 at 10:40 am
Thanks Geoff for the information. I have seen the 5 year term all over this website and it just struck me as odd (just never thought of anything but a 15 of 30 year term). Isn’t it just amazing how what is “normal” is all about frame of reference.
June 9, 2010 at 10:24 am
I have a friend from the states and we were getting mortgages at the same time (2004), it is very different between the two countries. I seem to recall for her ‘term’ & ‘amortization’ was the same, whereas in Canada we can amortize over 25 years but the term is 5 years or even less (or occasionally more as Geoff mentioned but I don’t know anyone who has a 15 year term mortgage).
I personally do find the ‘term’ concept confusing and so many people use it as an opportunity to reset the amortization or consolidate debt. It will be interesting to know how long it really takes to pay off a mortgage now vs in the 70s when my parents took out a 15 year mortgage and paid it off in…15 years! No more, no less.
June 10, 2010 at 4:50 pm
I love this website. I get so many tips from it on a daily basis. It was a real eyeopener for me to track where our money was going and now have a plan to have it paid off in less than 3 years except for our mortgage.
We are fortunate to have not bought more house than we can afford. It will be paid off in 16 years. We have lots of friends who bought huge houses with 35 year mortgages and no money down. Will be interesting to see how they fair at renewal time.
I’m not saying that I’ve been an angel. We did refinance (TWICE) and just ran the debt back up that we paid off. We finally get it. It was a hard lesson but we get it. We’ll have two student lines of credit paid off within the year and will have an additional $300 a month to pay against our mortgage. Hopefully it will help make up for the amount we wasted in our refinance.