Debts are about to get more expensive

How your household will be impacted depends on whether you’re a borrower or a lender, says Gregor W. Smith, the Douglas D. Purvis Professor of Economics at Queen's University.

Borrowers, as in people with debts like credit cards, mortgages and car loans, will soon find their bills rising. The interest on variable rate loans, like HELOCs, tends to go up as soon as the Bank of Canada hikes. Interest on fixed-rate debt goes up more slowly.

“From an economist’s point of view, monetary policy works rather slowly,” says Bernard Wolf, Professor Emeritus of Economics and International Business with the Schulich School of Business at York University in Toronto. “This is not something that turns on a dime.”

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That being said, if concerned consumers are thinking about prioritizing dealing with debts that may soon become much more expensive, both Smith and Wolf immediately note that credit card rates are already astronomically high.

“Even if those rates change differently, the level of the interest rate on credit card debt is always higher,” Smith says. “So reducing that would always be a priority that financial planners would recommend to households.”

The next debt that jumps out to economists is mortgages. Rising interest rates translates into mortgages costing homeowners more. For those with variable-rate home loans, the effect will be almost immediate.

The same goes for home equity lines of credit (HELOCs).

If he had a variable-rate loan, Wolf says he’d convert it to a fixed-rate loan as fast as he could.

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A windfall for savers

Both Wolf and Smith point out that it’s important to consider the bank’s intentions here. The situation Canada finds itself in now is a result of the major fiscal stimulus the federal government passed as soon as the pandemic hit, coupled with the Bank of Canada’s expansion of the country’s money supply.

Now the bank finds itself changing course to get inflation under control.

Wolf adds that many economists feel the Bank of Canada is actually behind the curve on this move and other monetary-tightening policies. While that’s been a boon for debt-holders, savers have been hurt by the central bank’s slow response.

“One has to realize that interest rates are at unbelievably low [levels],” says Wolf. “The market, the monetary conditions are unbelievably easy. Basically, money for the best creditors is practically free. And that period is coming to an end.”

Smith says those who have savings should soon see the results of the bank’s interest rate hike — if they haven’t already.

He notes that rates on Guaranteed Investment Certificates (GICs) have already started to go up in anticipation of the announcement from the bank.

Wolf adds that while savers do benefit from that response, with inflation as high as it is, it’s likely to offset major gains.

So while Wolf recommends borrowers prioritize clearing their most expensive debts (as in the ones with the highest interest rates) first, to savers he offers this advice: “You should diversify your portfolio as much as you can, within reason.”

Buckle in for a tough winter either way

Higher interest rates are going to mean you pay more to borrow money. However, inflation is already accomplishing that.

You have likely noticed prices climbing at the gas pump or the grocery store, where the average family of four can expect to pay nearly $1,000 more this year for food, according to the 2022 Canada’s Food Price Report.

Meanwhile, supply chain issues are being compounded by the Canadian and U.S. governments’ vaccination policies for truck drivers crossing the border.

This comes as the country is limping through its fifth wave of COVID and dealing with an overburdened healthcare system and labour shortages across industries.

Wolf equates all these economic and pandemic-related challenges converging with a major winter storm.

As an economist, he can’t say how long the aftermath of the storm will last. But for now, most are safe and warm inside. Storms do eventually pass and one just hopes they’re fortunate enough to have a sturdy foundation and four walls to protect them from the worst of its effects.

And even more importantly, this isn’t the first inflation storm we’ve weathered.

“I'm old enough to have seen all this before,” says Wolf. “A lot of people don't really know how to react … but this isn't really new.”

While the pandemic has likely caused as well as complicated the situation, storms don’t last forever.

“It's natural to be nervous,” says Smith. “But, you know, we're just kind of going back to where we were before. This is normal life. And hopefully, it's one where we also have lower inflation.”

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About the Author

Sigrid Forberg

Sigrid Forberg

Associate Editor

Sigrid’s is Money.ca's associate editor, and she has also worked as a reporter and staff writer on the Money.ca team.

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