Last week for the first time in seven years the Bank of Canada increased its overnight interest rate from half of one per cent to three quarters of one per cent.
This is significant to all of us because interest rates rise and fall based on the Bank of Canada overnight interest rates.
Within an hour of the announcement, one of Canada’s Big 5 banks increased their prime rate a quarter of a per cent, and the others quickly followed.
In simple terms, it is going to cost us more to borrow money.
Mortgage rates will increase and lines of credit will become more expensive.
There is speculation that this is just the beginning.
Many think interest rates will continue to rise.
The future of interest rates lies with the Canadian economy.
As things stand now, inflation is under control.
If the Canadian economy begins to overheat then interest rates will be increased to slow down that excessive growth.
We can only guess what will happen to interest rates in the future.
What we do know is if interest rates continue to rise it will result in hardship for those Canadians who have overextended themselves.
The past era of low interest rates has resulted in many of us having a false sense of security.
We have borrowed money in record numbers thinking that interest rates will remain low.
Now we find ourselves with too much debt and if interest rates rise any further many will not be able to pay the interest on their debt.
Nor will they have the necessary cash flow to pay off the debt itself.
Is this serious?
Depending on how much interest rates increase, it could be extremely serious for some.
The irony is that we have been warned a number of times by the federal government and the Bank of Canada about excessive borrowing.
We have been advised to better manage our debt.
The simple message is that debt can get out of control.
Debt has to be paid off and too much debt can lead to extreme hardship.
The hypocrisy of these warnings is the Canadian government, as well as the Ontario government, have been doing exactly the same thing that Ottawa advised us against.
Neither of the levels of government have been properly managed.
Despite the growing amount of debt, the two governments continued to borrow money.
At the same time, they advised us to live within our means.
However, there is no indication they know how to live within their means.
Consumers, as well as our governments, are knee-deep in debt.
So here we are in a bit of a financial predicament.
If interest rates continue to rise, those in debt will suffer the consequences, and it could get ugly.
Develop a written plan on how you can decrease your debt.
Check to see if some of your more expensive debt, with the higher interest rates, can be converted to a lower costing debt.
Consider this small increase in interest rates as a warning.
Heed this warning and do your best to reduce or eliminate personal debt.