As we write this post the Federal Bank in the US is suggesting that interest rates will rise soon in the next year or so as the economy improves and worries turn from a bad economy to one of inflation. The Canadians also say the same thing about their economy and plan to raise interest rates sometime soon. Neither will give an exact date since it depends on what is happening in the economy.
Most bankers will take steps to control inflation, and the single way they can do this is to raise interest rates to make it less attractive to borrow money, which has the impact of decreasing spending. Fewer people are buying products and services so prices stop rising or perhaps even decline a bit. Consumers also take on less debt at times like these.
If you do have a lot of debt now, you could still be ok if your interest rate on this debt is locked in for a few years. With a mortgage that has another 4 years on its term, for example, you need not be concerned about interest rates going up in the next year because yours will stay the same. On the other hand, if your mortgage is going to be renewed in the next year or so, then almost certainly your rate is going to increase, and your monthly payments will also increase.
If you are managing your debt you have already taken into account that the payments are going up and have a plan to deal with this increase.
There are several solutions to managing debt in situations where interest rates are rising. We will cover them in the following paragraphs.
Avoid More Debt – the first one is the obvious one. Just avoid taking on more debt. Keep your debt low and avoid loans for the toys we all want, the 2nd car, the boat, etc., etc. When interest rates do rise, you will be less affected than others who have lots of debt.
Salary Increases – either by receiving promotions, salary increases, both spouses working, or by taking on second jobs, you find the money to pay the extra payments when interest rates rise, and your monthly payments also go up. This approach has a big impact on quality of life if you take a second job and you cannot be sure of the salary increases. As well, what would happen if one of you lost a job?
You can save some money when there are interest rate increases and renewals of your mortgage. Use spare cash to pay down the mortgage and recalculate your monthly payments. If interest rates increase, it will drive up your payments. The additional payment on your mortgage will bring the monthly payment down. If you have done your homework, the new payment will be very close to the old one.
Pay Your Mortgage More Quickly – most mortgages and all personal loans allow for extra payment once a year. The effect of making these special payments is that you are paying more principal with each payment, decreasing the life of the mortgage and reducing the total of what you owe. At renewal time, you can often keep the same payment you had, even though interest rates have increased.
Assess your situation and Apply Debt Management Techniques
Everyone’s situation is different. We have covered a couple of suggestions in the preceding paragraphs. The important step to take is to assess your situation, analyze the impact of an interest rate increase on you and your family and then evaluate solutions that will allow you to maintain the quality of living you are currently enjoying. It takes a bit of work, but what doesn’t, especially if there is value at the end? Get started on debt management today.
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