Canadians need to prepare for a changing financial landscape that includes higher interest rates.
On January 17, the Bank of Canada raised the key interest rate from 1% to 1.25%, which led most major banks to raise their lending rates 25 points as well. This means borrowers will likely pay more when getting a mortgage or loan, but savers will also see a bonus in the interest they earn. It's the central bank’s highest interest rate since 2009 and, as this is the third time since July 2017 there has been an increase, there are worries this is just the beginning.
These worries, that there’s more rate hikes to come, is already having a big effect on the financial confidence of Canadians.
Increased Rates Cause Canadians to Worry About Their Financial Future
CIBC published its annual financial confidence survey just prior to the Bank of Canada announcement and, at the time, 77% of Canadians said they were confident about reaching their financial goals this year. About 70% were also positive about their financial situation, even though an equal percentage said they had concerns about higher food and utility costs. Some of the reasons why people were confident about their finances included: the rising stock market, the raise in minimum wage, and moderate economic growth.
However, that positivity wavered once asked about a potential interest rate hike, with 59% saying they would be significantly less confident if (and now when) rates increased. Another recent survey by CIBC showed two-thirds of people wanted a better handle of their finances and half wish they’d paid down more of their debt when interest rates were so low.
This worry is also shown in a similar recent Ipsos poll by MNP Ltd., which revealed that more Canadians are worried about their debts right now. Almost half of those surveyed (48%) said they are $200 or less from being able to make ends meet and 33% are unable to cover monthly bills and debt repayments. As a result, four in 10 (42%) expressed concern that if interest rates increased much more they would be in financial trouble.
Minimize the Worry by Planning Now
If you’re struggling with your finances, especially after the interest rate change, CIBC offers the following tips to help you meet your financial priorities:
- Create a financial plan that itemizes your income and expenses so you can see where your money goes.
- Focus on paying off any high-interest debt you have, or consider consolidating your debts into one loan.
- Evaluate your spending and identify areas where you may be able pare back discretionary expenses.
- Start saving now. Even if it is a small amount, set aside some money from each paycheque into a separate account.
- Get an expert opinion from someone who can help you put realistic steps in place so you can make real progress toward improving your financial situation.