Protecting yourself if interest rates rise

From Financial Consumer Agency of Canada

How a rise in interest rates affects you

A rise in interest rates can cost you more to borrow money.

When interest rates rise, your loan payments will increase if:

  • you have a mortgage, a line of credit or other loans with variable interest rates
  • you'll soon need to renew a fixed interest-rate mortgage or loan

Preparing for a rise in interest rates

Pay down debt as much as possible to prepare for a rise in interest rates. If you have less debt, you may be able to pay it off more quickly. This will help you avoid financial stress caused by bigger loan payments.

Here are ways to prepare for a rise in interest rates.

  • Cut expenses so you have more money to pay down your debt
  • Pay down the debt with the highest interest rate first so you pay less money towards interest
  • Consider consolidating debts with high interest rates, such as credit card debts, into a loan with a lower interest rate but keep your payments the same
  • Avoid getting the biggest mortgage or line of credit that you're offered
  • Consider how borrowing more money could limit your ability to save for your goals
  • Find ways to increase your income to help you pay down debt
  • Make sure you have an emergency fund to deal with unplanned costs

Get tips on paying down your debt and making a plan to be debt-free.

How interest rates work

If you’re borrowing money, interest is the amount you pay to your lender for the use of the money.

Financial institutions set the interest rate for your loan. Interest rates rise and fall over time. The interest rate is used to calculate how much you need to pay to borrow money.

The interest rate for your loan is included in your loan agreement. Find out what your financial institution must tell you about interest rates when you borrow.

Make sure you understand your rights and responsibilities when you borrow money.

Fixed and variable interest rate loans

When you borrow money, your financial institution may be offer you a choice between a fixed interest rate loan and a variable-rate loan.

Fixed interest rates stay the same for the term of the loan.

Variable interest rates may increase or decrease over the term of the loan.

Keep in mind that some lenders may offer you a lower introductory rate for a set period of time for certain types of loans. Make sure you can still afford the payments at the regular, higher interest rate.

Examples of the effect of an interest rate rise on your monthly loan payments

The following examples show you how each loan payment will be affected if interest rates rise.

How a rise in interest rates will affect your mortgage payments

Suppose you have a mortgage of $278,748 with a variable interest rate. Your interest rate is currently 3.1%. You have 23 years left in your amortization (or repayment) period.

Your mortgage payment will increase by $457 a month if interest rates rise by 3%.

Figure 1: How much your monthly mortgage payments will increase if interest rates rise

Figure 1: How much your monthly mortgage payments would increase if interest rates were to rise
Figure 1 - Text version
Interest rate increase no change 0.5% 1% 2% 3%
Total monthly payments $1,411 $1,483 $1,556 $1,709 $1,868

How a rise in interest rates will affect your personal loan

Suppose you have a personal loan of $6,000 with a variable interest rate of 4.75%. Your interest rate is currently 4.75%. You want to pay it off in two years.

Your loan payment will increase by $9 a month if interest rates rise by 3%. That adds up to $108 more per year.

Figure 2: How much your monthly personal loan payments will increase if interest rates rise

Figure 2: How much your monthly personal loan payments would increase if interest rates were to rise
Figure 2 - Text version
Interest rate increase no change 0.5% 1% 2% 3%
Total monthly payments $262 $264 $265 $268 $271

How a rise in interest rates will affect your car loan payments

Suppose you have a car loan of $10,000 with a fixed interest rate of 5.5%. You have three years left in your term. Your monthly payments are $302.

Your monthly payments won't increase if interest rates rise because the interest rate on your loan is fixed. However, if you have to put more money toward other loans when interest rates rise, you may have difficulty with, or may no longer be able to make, your car payments.

If you need to renew or renegotiate your loan, your loan payments may increase if interest rates rise.

How a rise in interest rates will affect your credit card debt payments

Suppose you have a credit card debt of $6,500 with a fixed interest rate of 19.9%. Your monthly payments are $330. You want to pay off your debt in two years.

Since you have a fixed interest rate on your credit card, your monthly payments will only increase if you choose to pay more each month. However, you may have less money to put towards your credit cards if the interest rates on your other loans increase. It may then take you longer to pay off your credit card, which will cost you more in interest in the long run.

If you can no longer make your minimum monthly payments by the due date, the financial institution that issued your credit card may increase your interest rate. It may increase by as much as 5%.

Banks and other federally regulated financial institutions must notify you before an interest rate increase takes effect.

How a rise in interest rates will increase your total loan payments

In the examples given above, your total monthly loan payments increase if interest rates rise. The following example shows you how all loan payments would be affected if interest rates were to rise.

Suppose you have the following loans:

  • a variable interest rate mortgage of $278,748
  • a variable interest rate personal loan of $6,000
  • a fixed interest rate car loan of $10,000
  • a fixed interest rate credit card debt of $6,500

In this example, a rise in interest rates means, you'll pay $466 more a month in loan payments if rates were to rise by 3%. That adds up to $5,592 more per year.

Figure 3: How your total monthly loan payments will increase if interest rates rise

Figure 3: How your total monthly loan payments would increase if interest rates were to rise.
Figure 3 - Text version
Interest rate increase no change 0.5% 1% 2% 3%
Total monthly payments $2,305 $2,379 $2,453 $2,609 $2,771

Figure out if higher monthly debt payments fit into your budget

  • Talk to your lenders to find out how much your payments would increase if interest rates were to rise by 0.5%, 1%, 2% and 3%
  • Look at how the higher payments would impact your monthly budget and your ability to save for your goals
  • If you’re outside your comfort zone, look at how you can reduce expenses or earn more money to pay off your debt faster

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