The increasing interest rates in Canada have become impossible to overlook, and they are likely affecting you and your loved ones more than you realize. Rising interest rates lead to higher rates on mortgages, loans, and even your savings accounts. 

Here are 4 of the most common ways in which rising interest rates affect the personal finances of Canadians. This knowledge can assist you in simplifying your financial planning.

Mortgages and loans become more expensive due to rising interest rates

If you have been hoping to purchase a home, rising interest rates mean that the available mortgage rates are higher. This could delay your timeline and delay any real estate purchases.

Current homeowners with variable rate mortgages are affected the most. Each time there is an increase in interest rates, their monthly payments also increase, sometimes within a matter of days. If you have an open mortgage, consider switching to a closed option as the interest rates on an open mortgage are often already higher than the interest rates on a closed mortgage. At the very least, this would prevent your payments from rising if the interest rate goes up again.

The housing market is likely to slow down as a result of rising interest rates

When mortgages become more expensive due to rising interest rates, fewer people can afford to buy homes. This causes the demand for housing to decrease, leading to a slowdown in the housing market. This slowdown can cause individual property prices to decrease, making them more affordable. However, it is important to note that even though the prices may decrease, the interest on a mortgage for a lower-priced home will still be higher.

Rising interest rates impact consumer debts

Individuals with variable rate loans or mortgages are affected by adjustments in interest rates by the Bank of Canada. As interest rates continue to rise, the amount of interest you are required to pay also increases. In other words, a variable rate makes it more challenging to pay off your debts.

On a broader scale, average Canadians are now shouldering more debt than ever before. According to an Equifax report from September 2022, total consumer debt has reached $2.32 trillion, representing an 8.2% increase from the previous year.

Rising interest rates positively impact your savings

Amidst the adverse effects mentioned earlier, it may come as a relief to discover that rising interest rates can have a positive impact on personal savings accounts.

High interest savings accounts are particularly influenced by these changes. When the Bank of Canada raises the prime rate, the interest rates on these savings accounts also increase over time. As a result, the funds you have in these accounts experience more growth.

The rising interest rates in Canada have wide-ranging effects on personal finances. While they make mortgages and loans more expensive, they also impact consumer debts. Understanding these effects can help us Canadians navigate our financial planning more effectively in a changing economic landscape.