Real advice for managing historic inflation and interest rate increases: Your questions answered! 

With Canada’s inflation rate reaching a staggering high at an overall rate of 8.1% in July, gas prices up 48% year over year, and grocery bills seeing an annual increase of 9.7%, many Canadians are feeling the squeeze on their household budgets. That’s why Coast Capital — Canada’s largest financial cooperative by membership and B.C.’s first federal credit union — is here to answer the questions keeping you up at night and provide the real advice you need to ensure you’re able to continue planning for the future while “recession proofing” your finances.

The Bank of Canada has already raised the interest rate four times this year, with the potential for additional increases to come. How do these rate hikes affect inflation and will it really improve affordability? 

Some inflation is always expected. But while the Bank of Canada aims to keep it around two per cent year over year, inflation is currently sitting four times above that benchmark. When inflation gets too high, the Bank of Canada targets the issue at its source by changing the interest rate charged to commercial banks (known as the target overnight rate). It can lower interest rates to boost spending and as the economy rebounds, it can raise interest rates again to avoid excessive inflation. It’s all cyclical, and the timing is dependent on the level of inflation. 

Higher interest rates encourage saving and discourage borrowing, and in turn, spending. In response, companies increase their prices more slowly than planned or even lower them to encourage demand, which typically reduces inflation and improves affordability. The Bank of Canada’s goal is to engineer a situation where they’re able to find a neutral rate that removes excess demand and avoids stimulating it without constraining demand or causing a recession. As we move forward, it will be crucial for the Bank to find this balance. 

I bought a home when the housing market was at an all-time high. As interest rates continue to rise, I’m concerned about being able to continue affording my mortgage. What should I be doing now to prepare for the increase and protect my investment?

Coast Capital

As a mortgage holder, it’s important to keep a keen eye on the path of rate hikes and what they will mean for growing monthly costs. However, not all mortgage holders will be impacted equally. Until your mortgage is up for renewal, fixed rate mortgage holders will not be affected by interest rate hikes, while variable mortgage holders will see their rates rise with each increase. 

If you have a variable mortgage and you’re able to, you might consider increasing your payments now. As interest rates climb, less is paid towards the principal and more towards the interest so this will allow you to get ahead. Another option is to switch into a fixed-rate alternative, which means all of your payments will remain the same for the entire length of your term. Although variable-rate mortgages tend to be cheaper than fixed-rate mortgages, fixed rates will allow you to avoid the uncertainty that comes with interest rate increases. 

Everyone’s situation is different and will impact how each person weighs their options. One great way to determine the best choice for you is to tap into a trusted resource like a Coast Capital mortgage specialist who can provide you with personalized expert advice to help you determine your next step.

Although inflation and the cost of basic necessities like food and gas are continuing to soar, salaries and wages are not keeping pace. If I’m on a fixed income, how can I plan for the future when the money I’m taking in doesn’t match what’s going out. 

If inflation and interest rate increases are putting more strain than ever on your finances, you’re not alone. To set yourself up for success amidst the uncertainty, it’s a good idea to regularly review your monthly spending. If you find that you’re needing to tap into savings to cover your regular expenses, take the opportunity to revisit your budget and expenditures and look for ways to cut spending. For example, there may be an opportunity to limit your subscriptions, whether it’s an unused gym membership, apps that you’ve forgotten about, or streaming platforms that you don’t use often. You may be surprised by how much money you spend on subscriptions that aren’t used enough. 

Speaking to a financial advisor is a great way to evaluate your financial health. There are also some free online tools like Coast Capital’s Money Chat, which can help you understand where you are, where you want to go, and how to get there. 

With so much uncertainty and talk of a potential recession, what can I do to “recession proof” my finances?

Coast Capital

Unfortunately, going through a recession during your financial life is inevitable and no expert is able to predict when one might occur. In the meantime, there are a few key things you can do in order to prepare. 

Begin building an emergency or contingency fund that is kept separate from your day-to-day budget to help you navigate any unexpected expenses and the uncertainty ahead of us. Surviving a recession also requires disciplined budgeting so now is the perfect time to pay down or pay off high-interest debt. Additionally, you might consider seeking additional income streams through investing or a “side hustle”. This allows you to supplement and diversify your current earnings, meaning your income won’t be completely cut off if you run into issues with work, and build up your savings reserve faster. Most importantly, don’t panic! Taking the time to assemble a plan and consult with advisors now will help you weather the storm.

This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors are subject to change without notice, and Coast Capital Savings Federal Credit Union is not responsible for updating this information. All third-party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee the accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.