So how 'bout those interest rates?

By Jill McKenzie

September 13, 2017 4:24 PM

Many of us that don’t make our living handling other people’s money also don’t pay that much attention when interest rates change. But we should.
So it’s gone up a quarter of a per cent since July? What’s the big deal?
The big deal is that rates are expected to keep on rising, and a quarter of a per cent in interest on a 25-year mortgage is a big deal indeed. In fact, the Bank of Canada has raised rates twice since July, for a total of half a per centage point.
How much does .5 of a per centage point matter, you ask?
Well, let’s get a mortgage calculator and figure it out.
Let’s say you have a $350,000 mortgage and your interest rate is 2.95 for a five-year term and a 25-year amortization.
Over the five-year term, you will pay $47,717 in interest and $51,127 on the principal (meaning that of the $98,844 you will have paid in five years, almost half is interest).
Add a quarter of a per cent to this equation and try it again.
That $350,000 mortgage at 3.2 per cent interest will cost you $51,851 in five years, over $4,000 more than the lower interest rate.
Taken over the entire 25-year amortization, that quarter per cent of interest will cost you $13,528 over and above the interest you were already paying.
Yeah, yeah. But what can
anyone do about it?
It’s true that most of us will have a mortgage to pay no matter what happens with interest rates.
But seeing the key lending rate go up twice in as many months should indicate that rates will continue to rise.
It’s up to us to realize how much these small increments are really costing.
The CBC predicts that The Bank of Canada will raise rates to a more historically normal level of three per cent by the year 2020.
That’s a two per cent hike over the Bank of Canada’s current key lending rate of one per cent. 
Returning to the example above, paying an additional two per cent interest on your $350,000 mortgage will cost you $85,280 over five years, while only $39,259 will have been paid on the principal amount.
Put simply, it’s going to cost a heck of a lot more money to buy the same things, and it’s going to take longer to do it.
The home equity line of credit
Your home equity increases as you pay down your mortgage and the value of your home rises.
It’s become popular to borrow against that equity, and it’s true that there are instances where the home equity line of credit is beneficial.
The interest rate is usually much lower than that of a credit card and you can make minimum monthly payments without having to pay it off in full.
Many people have looked at that equity as a life line in times of crisis, for example, an extended illness or lay off.
The key is to use a line of credit of any kind as a very short-term loan. If you find yourself maxing it out with purchases that aren’t essential, it’s time to get a handle on that spending.
Experts caution against treating your home’s equity like an ATM.
What you have borrowed against it must be paid off when you sell, and something as simple as an interest rate increase might be enough to derail those who’ve become overextended.
Ideally, it’s better to allow your home equity to accumulate because there should be less chance of defaulting on your loan.
In “Interest rates have finally increased: How that could affect your loans,” the CBC lists four places where Canadians can expect to pay more: mortgages, lines of credit and home equity loans, credit cards, and student loans.
If you happen to have all of the above, I hope you’re paying attention now.
There really isn’t anything we can do to control interest rates. What we can control though, or ought to start trying to control, is the manner in which we accumulate debt. Because debt is about to get more expensive and, over the long haul, the cost might be crippling.
It’s time to get serious about debt. Even if you are almost debt-free, there is money to be saved by locking in at a lower rate or shuffling your money around to pay off some smaller loans.
Put off unnecessary travel or expenses and focus on reducing your liabilities before the rates increase even more.
If you were worried about your debt-load before rates started to rise, now might be a good time to consult with a professional.
Don’t allow a problem to fester into a crisis. Seeking professional advice now will save you stress and money, while not asking for help might cost you more than you can imagine.

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