Managing your money when interest rates rise
The Financial Consumer Agency of Canada (FCAC) has expectations for federally regulated financial institutions. FCAC expects them to help you if you're struggling to pay your mortgage due to exceptional circumstances.
Learn more about paying your mortgage when experiencing financial difficulties.
When a rise in interest rates may affect you
A rise in interest rates often means that it will cost you more to borrow money.
A rise in interest rates may affect you if:
- you have a mortgage, a line of credit or other loans with variable interest rates
- you’ll need to renew a fixed interest rate mortgage or loan
Your financial institution could also increase your interest rate if you don’t make your payments on time.
How interest rates work
Interest rates rise and fall over time. If you’re borrowing money, interest is the amount you pay to your lender to use the money. The lender uses the interest rate to calculate how much you need to pay to borrow money.
Financial institutions set the interest rate for your loan. This could be a mortgage, a line of credit or another type of loan.
You’ll find your interest rate in your loan agreement. Your financial institution must also provide you with certain information about interest rates on your loan.
Learn more about your right to information when you borrow money.
Fixed and variable interest rate loans
When you get a loan, your financial institution may offer you a fixed or a variable interest rate.
A fixed interest rate will stay the same for the term of your loan. A variable interest rate may increase or decrease over the term of your loan.
Some lenders may offer you a lower introductory rate for a set period for certain types of loans. Make sure you’re still able to afford the payments at the regular higher interest rate.
Dealing with a rise in interest rates
Pay down your debt as much as possible to deal with a rise in interest rates. If you have less debt, you may be able to pay it off more quickly. This may help you avoid the financial stress caused by higher interest rates and bigger loan payments.
You may deal with a rise by using these tips:
- reduce expenses so you have more money to pay down your debt
- pay down the debt with the highest interest rate first. This may allow you to pay less interest over the term of your loan
- consolidate high interest debts, such as credit cards, into a loan with a lower interest rate
- avoid getting the maximum mortgage or line of credit that a lender offers you
- avoid taking on unnecessary debt with things you want but don’t need
- avoid borrowing more money as it 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 unexpected expenses. This may help you cover higher loan payments to avoid penalties
Learn more about paying back your debt.
Trigger rates and negative amortization
A variable interest rate mortgage with fixed payments may be riskier than you expect. When interest rates rise, more of each payment automatically goes toward interest costs.
You could end up in a situation where none of your payment goes toward paying down the principal. Instead of paying down your mortgage, the total amount you owe on your mortgage will increase. You may have to contribute more capital to avoid problems renewing your mortgage. Acting early is important to prevent the situation from getting worse.
If you have a variable interest rate mortgage with fixed payments, contact your financial institution as soon as possible to discuss your options.
You may have a mortgage or a loan with a variable interest rate and fixed payments. When interest rates rise, you may reach your trigger rate.
Your trigger rate is the interest rate at which your mortgage or loan payment only covers interest costs. When you reach your trigger rate, none of your payment goes toward paying down the principal. This means that your payment doesn’t cover the full amount of interest for that period.
When this happens, your bank will generally add the unpaid interest to the balance you owe on your mortgage or loan. This brings you into negative amortization.
In cases of negative amortization, unpaid interest builds up and the total amount you owe will continue to increase. If you don’t take action, you’ll owe more money than you expected when you agreed to the mortgage or loan.
The best way to find out your trigger rate is to review your mortgage or loan agreement. You may also contact your financial institution. They’ll be able to calculate the exact rate for you. They’ll also be able to let you know your options if you reach your trigger rate.
If you reach your trigger rate, your financial institution may require you to:
- increase your payments
- make additional payments to cover the excess interest
- change to a fixed rate mortgage or loan
If you’re not at the maximum amortization period allowed, your financial institution may offer to extend your amortization. This would avoid having to increase your payments. However, extending your amortization means paying for a longer period and paying more interest in the long run.
When interest rates are on the rise, contact your financial institution as soon as possible. Ask them about your trigger rate and discuss your options.
Impact of a higher interest rate on your loan payments
The following examples show the impacts of an increase in interest rates on your:
- mortgage
- personal loan
- credit card
How a rise in interest rates could affect your monthly mortgage payments
Suppose you have a mortgage of $300,000 with a variable interest rate and a 25-year amortization. Your interest rate is currently 5% and it goes up to 6.5%. Your mortgage payment will go from $1,745 to $2,009. An increase of $264 a month.
Figure 1: Example of monthly payments for a mortgage of $300,000 with an amortization of 25 years at various interest rates
Text version: Figure 1
| Interest rate | 2.0% | 2.5% | 3.0% | 3.5% | 4.0% | 4.5% | 5.0% | 5.5% | 6.0% | 6.5% | 7.0% |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Monthly payment | $1,270 | $1,344 | $1,420 | $1,498 | $1,587 | $1,660 | $1,745 | $1,831 | $1,919 | $2,009 | $2,101 |
Use the Mortgage Calculator to see the impact of an interest rate increase on your mortgage.
How a rise in interest rates could affect your personal loan monthly payments
Suppose you have a personal loan of $10,000 with a variable interest rate and a 2-year term. Your interest rate is 14.99%.
Your loan payment will increase by $24 a month if interest rates rise by 5%. That adds up to $552 more in interest over the 2 years.
Figure 2: Example of monthly payments for a personal loan of $10,000 with a 2-year term at various interest rates
Text version: Figure 2
| Interest rate | 9.99% | 14.99% | 19.99% | 29.99% | 39.99% |
|---|---|---|---|---|---|
| Monthly payment | $461 | $485 | $509 | $559 | $612 |
When a rise in interest rates could affect your credit card payments
There are times when fixed interest rates on credit cards could also rise.
For example, you have to make your minimum monthly payments by the due date. If you don’t, your financial institution may increase your interest rate. In the case of credit cards, the rate will usually increase by 5%, but the increase may be higher.
Short-term promotional financing or deferred interest offers may be another reason that your fixed interest rate may increase. Make sure you know how long an offer lasts. This way, you’ll expect the increase in your minimum monthly payments once it ends.
Banks and other federally regulated financial institutions must notify you before an interest rate increase takes effect.
Learn more about your right to information when getting a credit card.
Reviewing your budget with your new debt payments
If interest rates rise and your debt payments increase, you may need to review and adjust your budget.
If interest rates rise and your debt payments increase, you may need to review and adjust your budget.
To prepare yourself, try the following:
- talk to your lenders to find out by how much your payments will increase
- look at how the higher payments will impact your budget and your ability to save for your goals
- see how you may reduce expenses or earn more money to pay off your debt faster
Use the Budget Planner to create or review your budget.
Make your budget and review it. If you expect challenges in making your payments, be proactive and don’t wait to seek help. Contact your financial institution to discuss your options.
They may be able to offer temporary accommodations such as:
- making special payment arrangements
- allowing you to skip a payment on your loan
- mortgage payment deferrals
Learn more about mortgage relief options.
You may also want to talk to a credit counsellor. They may help you explore the different solutions that are available to you.
Learn more about getting help from a credit counsellor.
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