Lack of rainy day fund to weather rising interest rates

Losing sleep over interest rate hikes?

More than half of Canadians are worried about rising interest rates taking a toll their personal finances. But, about a quarter of the worried Canadians have no emergency funds to help see them through tough times.

In September the Bank of Canada raised its rates to 1 per cent. This was their second increase in three months based on data-driven forecasts showing financial growth in Canada is steady with solid employment and income growth.

 

The reality, however, is far from what numbers suggest.

Canadians are afraid the good times have come to an end after nine years of ultra-low interest rates. With low rates for almost a decade, some may have overextended themselves thinking rates won’t go up anytime soon.

Not everyone is fretting about the rate hikes though. Debt free seniors are definitely going to welcome higher returns on their GICs and fixed-income investments. And there are always those who don’t think this will affect them either way.

Lack of emergency funds

About a quarter of Canadians have no emergency savings at all, and only about a half of those concerned over rate hikes have a cushion of a month or less.

All financial planning tips would suggest having enough savings for three to six months as a buffer against job loss or any other damaging event. Still, just a minority of Canadians have even that much saved up. Predictably, the only people with sufficient savings are in the 55 or older age bracket.

Younger Canadian are the worst off with more than a third (35 per cent) of millennials aged 18 to 34 surviving with no savings at all and another 10 per cent with less than a month’s worth of savings.

Housing costs and rising rates

Thanks to high housing costs in major cities, it’s not really surprising that majority of young Canadians, and those of any age with minimal wealth, are concerned about rising interest rates.

If rates rise another percentage point, things will be much worse for the average Canadian – considering the number of people who are only a paycheque or two away from financial disaster, with little to no cushion for job loss, a rate hike or to repair any financial loss.

Those in the older age brackets are relatively safe since they generally have little or no mortgage debt and likely bought their homes when housing was much more affordable.

High-priced housing markets like those in Toronto and Vancouver have already been impacted by rising rates. “House poor” is a reality for many people who bought more than they can afford, and are now being forced to move to other types of credit to make up the difference, digging themselves further into debt.

Debt management in the era of rate hikes

Rising interest rates probably will not affect credit-card rates since they’re already high. But, a rate hike does affect anyone with non-fixed debt, like variable mortgages or lines of credit, or even home equity loans.

Because Canadians are carrying record levels of debt, they are having a tougher time with saving money. Just making payments on existing debt it hard enough as it is.

For many homeowners, the rising rates will make mortgage payments unaffordable, increasing default rates, and ultimately driving up consumer insolvencies.

Weathering the interest rate hike

Even though all the concerns are well grounded given the financial reality of Canadians today, the best way to stay afloat is to save whatever way you can. Make a budget, stick to it and cut down on spending as much as you can.

For homeowners who have been complacent during the long period of protracted low rates, despite rising housing prices, using the home equity as a “get out of jail free” card is an option. You can use the refinancing to pay off unsecured debt like credit cards.

At the end of the day though, it’s good to keep an eye on how rate hikes progress. While rate hikes won’t stop, it is safe to assume that future hikes by the Bank of Canada will be relatively moderate.

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