We’ve been hearing reports for months now that the Bank of Canada is likely to raise the Canadian interest rate in the coming months, and just a few weeks ago it finally happened. As it stands, Canada’s interest rate is sitting at 0.75%. The previously low rate made it possible for many Canadians to enter a turbulent housing market that continues to grow. However, amidst speculation that the rate could be set to rise again in the near future, many are questioning their ability to hold steady financially.

What many Canadians don’t realize is that a 1% rate increase, for example, does not signify a 1% increase in payments. The reality is far more troublesome. In fact, a 1% rate hike could actually result in a 10%+ increase in mortgage payments. For instance, if you have a $200000 mortgage, at 3% interest, you’re paying $6000 in interest per year. However, if that rate increases to 4%, the interest grows to $8000 per year, which means you’re actually paying 33% more.

A recent study done by Manulife Financial highlights how worrisome an increase to interest rates could be for a large portion of Canadian homeowners. According to the study, nearly 75% of Canadian homeowners interviewed said they would have difficulty making their mortgage payments if those payments were to increase by more than 10%.

A further 38% said they could handle a mortgage payment increase of between 1 and 5% before they would have financial difficulty, while 20% said they could sustain an increase between 6 and 10%, and an additional 14% said that any hike would be a problem.

As you can see, the study highlights just how unprepared many Canadians are if their debt repayment responsibilities were to increase.

Furthermore, the Manulife survey found that millennial homeowners would be in the most trouble. This group would have the most difficulty, with 45% saying making their mortgage payment would become impossible within three months or less if the primary income-earner in the family were to suddenly become unemployed.

If these numbers are cause for concern, perhaps you’re best served by examining the options to reduce or realign your current debt. For example, refinancing your mortgage to consolidate debt while interest rates are still low can significantly reduce your monthly payments and make even a 10% increase far more manageable. With housing prices high, this results in significant equity, meaning refinancing is usually far more feasible. If housing prices drop, this equity will also drop.

With interest rates already going up, there’s no telling what’s to come. If you’re worried that a further rate increase could drastically impact your financial situation, don’t wait – get things sorted now while the market is still in your favour.

At DebtCare, we can help you discover how to best situate yourself for financial stability.

Call us today to discuss a solution: 1 (888) 890-0888.

Source: The Huffington Post, “Canadian Homeowners Would Be Screwed By 1% Interest Rate Hike: Poll,” http://www.huffingtonpost.ca/2017/05/24/canadian-homeowners-rate-hike_n_16782802.html.