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Pattie Lovett-Reid

Chief Financial Commentator, CTV


Don't be the last to leave the party.

You have been warned and how you respond will be up to you.

Bank of Canada Governor Tiff Macklem couldn't have been more clear - rates will be headed higher. The reference Macklem made during a press conference to a “significant shift in policy” suggests to me the days of cheap money will be gone in the not too distant future. The party may not be over but it is getting pretty darn close.

While the Bank of Canada left rates unchanged at 0.25 per cent, all bets are off come March if better news on the virus arrives before that meeting. Many believed rates would have headed higher at the Wednesday announcement and I'm certain there were Canadians contemplating the impact on their household balance sheet.

A popular question was from those in variable rate mortgages, who are on edge wondering if now is the time to lock in, especially given fixed rates have been on the rise over the past couple of months. How you respond depends on your comfort level and affordability. It is however, prudent to explore the options to determine what is right for you.

Households that have been assessing how much higher rates will cost them already know the short answer – it will cost them more. The question is how much more. You need to know your numbers and while credit tied to the bank rate will cost you more, the hope is high inflation will soon begin to subside.

A financially-responsible household could still get by with the shift in policy and economic landscape.

This is a logical approach that simply makes sense if you are in control of your financial situation. My fear is that not all households think this way.

In an April 2021 survey by MNP, six in ten respondents said that the low-rate environment made it a good time to buy things they might not otherwise be able to afford. I found the results to be outrageous back then - and still do.

We can't naively think now is the time to splurge simply because the window on ultra-low rates is closing. Gone are the days of spending as if there is no tomorrow, racking up debt and being in denial. The economy is improving enough to warrant a higher rate environment.

Now is not the time to binge spend. Now is the time to take action. Otherwise, the day of reckoning will hit those most financially vulnerable.

But it doesn't have to be this way.

Begin by outlining how much money you have coming in. What sort of variable rate debt obligations do you have that could be impacted by higher rates? When it comes to the basket of goods you buy - be very clear on what you’re spending your money on. Your inflation rate could be much lower or higher than the current 4.8 per cent pace. It all comes down to where you spend your money.

The wildcard for me is the households who were carrying record amounts of debt prior to the pandemic. They may have been forced to pause spending during lockdowns, but they could revert back to their old spending habits.

The pent-up demand is shifting as Canadians crave an opportunity to travel and experience what has been denied during lockdowns whether they can afford it or not. Sadly, I can't help but wonder if debt levels will resume their upward trajectory as vacations get booked, travel plans get confirmed and services are embraced regardless of affordability, all in an effort to beat higher rates.

We need to stop spending if we can't afford it, regardless of the interest rate.

I've said it before and will again, "what would be far more appropriate for struggling households would be to hit the pause button and look for solutions to get out of this debt trap".

Bottom line: Don't grab that last hurrah and spend recklessly in an effort to beat higher rates by spending on goods or services you simply can't afford.