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Managing the impact of higher interest rates

Increased borrowing costs may be affecting your finances – here’s what you can do

CIBC Dec. 20, 2023 5-minute read

Whether it's a mortgage for a house or a line of credit to cover a major expense, many of us borrow money to help achieve our goals. The cost of borrowing — how much interest you pay on top of what you borrowed — depends a lot on the interest rates set by the Bank of Canada (BOC). Not too long ago, these rates were at historic lows, which was great for anyone borrowing money to fund their goals.

But there’s been a significant shift. Due to persistent high inflation and excess demand coming out of the Covid-19 pandemic, the BOC raised rates multiple times. This was done to slow down spending and bring inflation closer to its 2% target. Now, with inflation gradually decreasing, it looks like things might start to stabilize, but the BOC has kept the option open to raise interest rates again if needed.

Even though rates may stabilize and potentially come down, if you’re renewing a mortgage or have a variable interest rate loan, your current or soon-to-be interest rates are likely to be a lot higher than they were. To manage the impact of higher interest rates, it’s important to understand how they can affect your debt, impact your monthly payments, and what you can do to adjust your budget accordingly.

What higher rates mean for you and your money

The first place where you'll feel the pinch of higher interest rates is with some forms of debt you may have.

Lines of credit: The interest payments on your line of credit are likely linked to the BOC's rate, so you'll be paying more interest as rates go up.

Mortgages: If you have a variable-rate mortgage, you may see your mortgage payments go up every time interest rates increase. If you have a fixed-rate mortgage, you won't feel an impact right away, but when your mortgage is up for renewal, your rate may increase.

Other debts: Many other types of loans, like credit cards and car loans, are likely to have fixed rates, so you won't feel an impact. But there are always exceptions. When in doubt, refer to your loan and credit card agreements.

Five steps you can take now to handle higher interest rates

If you have a clear picture of your financial situation and a solid plan in place, you'll be in a much better position to deal with the impact of higher interest rates. Here are steps you can take now to make sure you're on the right track.

1. Review your budget

Even though interest rates are supposed to cool inflation, you will probably see higher interest charges alongside higher grocery and gas costs at the same time. Keep a close eye on your budget and think about whether you need to cut back on some expenses or save up a little more to make a purchase. An easy way to keep track of your finances is by using an online Budget Calculator.

2. Pay down high-interest debt first

Start by looking at your debt and prioritize paying off anything with higher interest rates, like credit cards or personal loans. By not prioritizing high-interest debt, a huge chunk of your money will be wasted on the accumulated interest. For example, if you only pay $150 per month for a $6,000 balance accruing 20% interest, it will take 6 years and cost an extra $4,000 in interest to pay off that card.

3. Keep an eye on your borrowing costs

Stay on top of your variable rate debt, as these will all be affected by rising interest rates. This includes student debt, lines of credit, home equity lines of credit and variable-rate mortgages.

Whether your rate increases right now or it affects you later down the line, revisit your budget to make sure you’re prepared for extra expenses — like renewing your fixed-rate mortgage.

4. Revisit your investment strategy

A silver lining of rising rates is that certain types of investments may become more attractive. Connect with our advisors about how higher interest rates can benefit your investment portfolio.

5. Explore debt consolidation

Debt consolidation combines multiple loans into one, offering benefits such as lower interest costs, simplified payments, and faster debt repayment.

Get expert advice

If you find yourself struggling to meet your debt obligations due to higher interest rates and the effects of inflation, reaching out to us can be a proactive step.

We have a dedicated and understanding team to help you navigate these financial challenges with expertise. Our advisors can work with you to explore tailored solutions that suit your unique financial situation. Whether it's restructuring your debt, adjusting repayment schedules, or providing valuable advice on managing your finances during uncertain times, we can support you on your journey to financial stability. Learn more about dealing with debt..

To improve your situation, contact our credit counsellors.

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Managing the impact of higher interest rates

What higher rates mean for you and your money

Five steps you can take now to handle higher interest rates

1. Review your budget

2. Pay down high-interest debt first

3. Keep an eye on your borrowing costs

4. Revisit your investment strategy

5. Explore debt consolidation

Get expert advice

Get help creating the life you want

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