Keeping a balanced budget

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For three years now journalists and economists have been warning us: “Watch out, interest rates are going to go up!” And then the rates stay down. Because they keep crying wolf, we don’t listen anymore—and that’s where the danger lies. One fine day, the rates are going to start rising and for some of us, it’ll be too late.

That’s the message from the Financial Consumer Agency of Canada (FCAC).

“While interest rates are now at all-time lows in Canada, it is likely that they will rise sometime in the future. Canadians need to look at how much debt they are carrying, particularly in the amount of their mortgages, home equity lines of credit, personal lines of credit and variable-rate personal loans,” says FCAC Commissioner Ursula Menke. “By doing a debt check-up, consumers can take a close look at their present debt burden and think about whether they would be able to handle it if their payments increase.”

The agency recommends that homeowners meet with their lenders to find out what their monthly payments would be if interest rates start to rise. If consumers can absorb the additional amount, then they don’t need to worry.

If not, how about solving the problem right now, either by increasing payments on other debts or by saving more. Unless your financial advisor has a different solution.

The agency gives an example that a rise in interest rates could have on your mortgage.

A couple has a 3.1% variable interest rate mortgage of $277,658. The current monthly payment is $1405. If interest rates rise, here’s what happens to the monthly payments:

0.5% interest rate increase:  $1,477

1% interest rate increase:     $1,550

2% interest rate increase:     $1,702

3% interest rate increase:     $1,861

According to the agency, in dollar terms, the couple’s mortgage payments could increase anywhere from $72 a month (or $864 per year) to $456 per month ($5,472 per year).

Keep in mind that your mortgage loan won’t be the only thing to feel the impact of a mortgage rate increase. Personal loans and credit lines will also be affected.

Before meeting with your lender, or if you’d like to assess the impact of a higher interest rate on your mortgage, the agency invites you to find out more by visiting its website:

You’ll find a tip sheet called Debt Checkup. Go ahead, try it out!

Photo: iStockphoto LP.