The Bank of Canada is expected at some point in the year to hike interest rates, and even a small and gradual hike would affect millions of Canadians with car loans, mortgages and lines of credit.
"Definitely not going to take much of a hike to make a difference and impact your payments," says Toronto-based financial planner Jason Heath. "As soon as there's a quarter-point increase in interest rates, I think it's going to have an immediate impact on people's psychology."
A Canadian increase would likely follow an American rise in the rates and may not come until the third quarter. But by the end of the year, Canadians could be facing a 1.5 per cent benchmark rate (it's currently at 1.0 per cent) and higher borrowing costs.
1. Pay down debt
Some consumers may be tempted to make large purchases before the rates go up, but analysts advise against that, saying consumers should instead focus on paying down debt first.
"I find that there's a feeling that because interest rates are low, you shouldn't pay down the debt — what's the point, what's the rush? But now may be an opportunity to focus more aggressively on debt repayment while interest rates are low," Heath says.
"If you make a lump sum payment against a mortgage or a line of credit, that's going directly to your principal and reducing the interest you’re going to pay in the future when rates do rise."
Although people may be tempted to pay down mortgage debt first, they should instead focus on department store or credit card debt where interest rates are much higher and unlikely to be affected by the Bank of Canada interest rate hike.
2. Lock in mortgage or line of credit rates
Common advice, says Ian Lee, assistant professor at Carleton University's Sprott School of Business, is that those who have a floating-rate mortgage or floating-rate loan should lock in with a fixed interest rate. But the downside, he noted, is having a fixed payment, meaning the principal and interest must be paid back over a specified time, unlike, for example, a home equity line of credit.
"But the question was how will you save more money, and the answer is: lock in your debts," Lee said. "If you have a variable rate mortgage, switch to a closed rate mortgage and lock it in for as long a term as possible, because once those rates start going up, we're never going to see them again."
3. Don't rush to buy a home
Higher interest rates could also lead to a correction in the housing market.
"The big issue as far as I can see is that people panic and think they have to get into the housing market before interest rates climb. But they have to recognize the overall long-term impact of interest rates actually climbing," says Laurie Campbell, CEO of Credit Canada Debt Solutions.
Homebuyers who rush out to purchase homes to beat a spike in rates could end up with homes dropping in value.
"I think people have to be vigilant about any big purchases they may be making in the next little while. Housing in particular," Heath says. "If someone is considering purchasing a house, they have to really look at more normal interest rates during their budgeting."
4. Sell the house?
Some Canadians have financially overextended themselves in their homes, leaving them barely any wiggle room in the event of an interest rate increase, says Chad Viminitz, an Edmonton-based financial planner and author of Money Assassins.
"To really put themselves in a good financial position, saving a cup of coffee or doing all those things you hear about, is really not going to help," said Viminitz.
"Because when you already have everything built into your house and into your vehicle and you get a one per cent change in interest rates? Well, a one per cent change on 50 per cent of your spending — you’re in a really really difficult position."
And it's a development that could force homeowners to make some difficult decisions, he says.
"If someone has the courage and that long-term view, and if they just bought a house in the last couple of years and they are really worried about interest rates going up, it may also be the right time to sell and to downsize to something that is more affordable," Viminitz suggests.
"And that’ s difficult. But we do come across a few people who said, 'I need to make a change, because I can't afford this, and saving money on coffee is not going to do this.'"