Debt ratio hits record 163.7%. What Happens as Interest Rates go Up?

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According to an article published by the CBC today, Canadians debt ratio hits record high of 163.7%.  That means that for every $1 Canadians earn each year in disposable income they owe $1.64 in debt.  The question is…what happens when the interest rates inevitably go up?

Interest rates have a big affect on Canada’s economy and have long been used to help manage Canada’s financial picture. Right now, Canadian’s have been enjoying a long period of low interest rates across the country, which is certainly one factor for the increase in debt.

For those individuals that are carrying debt, and are living in a home that they can just barely afford with current interest rates, this could be a big problem.

For example, if you have a house with a mortgage rate at 3 per cent, if it is up for renewal and the rates change to even 5 per cent this could make the monthly mortgage payment increase from $955.76 per months to $1,173.00 per month on a $200,000.00 mortgage. That is almost $200.00 more per month than your current budget.

There are a lot of individuals that are already struggling to meet their obligations to their creditors and an increase to their monthly expenses may have a huge impact on their ability to pay their debts and maintain their mortgage payments.

Now, let’s look at this scenario even further. If your mortgage payments increase and you can’t afford your debts, you may look at the option of consolidation. The issue is that higher interest rates also mean a higher cost of borrowing for consumer debt. The consolidation loan that you could get for about 7 per cent, might now cost 10 or even 12 per cent in interest per annum. At that higher interest rate, consolidating your credit cards or loans might not be possible as the monthly payment might still be too high.

This is what starts the cycle of debt for many individuals. The cost of maintaining their debt and household expenses increases and they need to use credit to supplement their income. The use of credit leads to increased costs to service the debt. By paying their minimum payments, they are taking away money that they need for basic household expenses like groceries or gas. It is an endless cycle that is difficult to break free from, and higher interest rates will only exasperate this problem.

You may be in a situation that sounds a lot like the example discussed above. If you can see yourself falling victim to the consequences of higher interest charges, and you are already stretched to the limit financially, it is time to seek the expertise of a trusted advisor.

Contact a trustee in your area to discuss your options for dealing with your debt issues. Don’t wait until interest rates make a manageable problem worse.

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