July 23, 2019

Mortgages from big banks consistently cost Canadians more, says rate comparison site

 Rajeshni Naidu-Ghelani

Mortgage rates from Canada’s big banks were consistently more expensive than those offered by smaller lenders last year, according to the latest findings from LowestRates.ca.

The financial product comparison website said the lowest rates offered by the “Big Six” — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, and National Bank of Canada — were always more expensive than the lowest rates from smaller lenders.

Justin Thouin, CEO of LowestRates.ca, said the big banks never offer the lowest posted rates on the market, and Canadians are not spending enough time researching rates before signing their mortgages, which could be costing them thousands a year.

a red stop sign sitting in front of a building: CBC

“We compare prices when we do less costly things, like take a trip or buy a TV, but we don’t shop around for rates for homes — one of the most expensive purchases we’ll likely ever make — despite the fact that the money we can save on a vacation pales in comparison to what we can save on a mortgage,” Thouin said in a statement.

Using RBC’s announcement last month that it was decreasing its five-year fixed rate mortgage to 3.74 per cent as an example, the site said with the new bank rate, customers would pay $2,560 per month on a $500,000 mortgage, assuming that a down payment of at least 20 per cent was made to buy a home in order to avoid the CMHC insurance and a 25-year amortization period.

But, if customers in the same scenario got the best available five-year fixed rate mortgage from a smaller lender at 3.23 per cent, the monthly payment would be $2,426, according to LowestRates.ca. That’s a difference of $134 a month, and would add up to $40,200 in savings over the course of a 25-year mortgage.

“Brokers and smaller lenders often drop their rates first to be more competitive, and banks are slower to implement changes, because they know they own the market,” Thouin said. 

“This will only change when Canadians realize they’re being overcharged and begin to shift away from the banks, and that will only happen as we increase awareness about the alternative market.”

Banks account for nearly 60 per cent of all current home mortgages, according to a report from Mortgage Professionals Canada last month. Mortgage brokers took up almost 30 per cent of the market, while credit unions and others accounted for the rest.

CBC News contacted all of the big six banks for comment on LowestRates.ca’s findings.

A spokesperson for National Bank said that many factors are taken into account and assessed — including each client’s individual situation — before fixing a rate, and granting a loan.

TD said they offered “competitive rates,” and flexible mortgage options to meet their customers’ needs.

The remaining banks declined to comment.

Why your neighbour’s kid is getting a better mortgage rate than you

Ted Rechtshaffen: The government has effectively decided to support home buyers who do not necessarily have the funds to buy a house

I used to think paying down debt and having a good credit rating would reward me.

Then I went to renegotiate my mortgage and was told that my five-year fixed mortgage rate would be 3.84 per cent. I thought that was pretty good until the neighbour’s 27-year-old kid told me the rate on his mortgage was 3.39 per cent for the same term.

Wait. What?

How did that kid get such a great mortgage while I’m paying an extra 0.45 per cent a year?

The answer is that in 2018, he is a much better credit risk for the bank. This may not make sense on the surface, but let me explain how crazy our mortgage system has become. From the bank’s perspective, they would rather lend to someone who put down very little but had their loan guaranteed by the Canadian Mortgage and Housing Corporation (CMHC), than to someone borrowing $300,000 on a $1.5 million house with no insurance or guarantee on the payment of that mortgage.

Now, it is true that in order to qualify for the low mortgage rates you would have to pay a one-time insurance payment to CMHC or another Insurer. At the moment, this insurance cost is usually a little more than the mortgage rate benefit of getting a lower rate for a low down payment, although there have been times this year, when it was actually better to pay for the insurance and get a much cheaper mortgage.

To understand how we got here, let’s start with the concept of an insured mortgage, an insurable mortgage and an uninsurable mortgage. These terms are key in 2018 to understanding the mortgage-rate mayhem.

Today, an insured mortgage is one where the value of the home is under $1 million, the down payment is less than 20 per cent, the amortization period is at a maximum 25 years, and the home is not a rental property. A person in this scenario can get a rate as low as 3.39 per cent on a five-year fixed mortgage. The borrower pays the mortgage default insurance premium. Mortgage insurers in Canada are CMHC, Genworth and Canada Guaranty.

An insurable mortgage is one where the value of the home is under $1 million, the homeowner puts down more than 20 per cent of the purchase price and the amortization period must be a maximum of 25 years. This person can get a rate as low as 3.74 per cent on a five-year fixed mortgage. The rate is higher as most lenders are insuring these mortgages at the lender’s cost. In other words, the lender is paying the mortgage default insurance premium instead of the borrower.

An uninsurable mortgage covers everything else, but is often simply one where the value of the home is more than $1 million. It also includes refinancing an existing mortgage or equity takeouts (meaning borrowing more to take some cash out of your home), or an amortization period up to 30 years. This person can get a rate as low as 3.84 per cent on a five-year fixed mortgage. The rate is the highest of the three scenarios as the lender cannot acquire default insurance for these mortgages.

(The bank) would rather lend to someone who put down very little but had their loan guaranteed by CMHC

According to Walter Lee, director of business development at First Financial Inc., the person in better financial shape, and with an uninsurable mortgage is facing one more hurdle they didn’t expect.

“Not only are these types of clients facing higher rates, but the renewal rates they receive from their current lender are less competitive than before, because the lender knows that you will face a stress test if you go elsewhere,” said Lee.

By stress test, Lee is referring to the new rule whereby you must qualify for a mortgage based on a formula that assumes you are borrowing at a rate two per cent higher than the actual rate you have negotiated or the Bank of Canada Qualifying Rate — whichever is higher. These days the Bank of Canada Qualifying Rate is 5.34 per cent. While this stress test may not really affect those with high income and good credit, for many people it is restricting the funds available to them to buy a house. With less credit comes lower house prices.

Based on these rules, is it any surprise that more expensive homes are suffering the most in terms of price decreases?

According to Lee, “clients often are shocked at the rate difference. They say ‘You are telling me I can get a better rate to put down less?’” Not only that, but many first-time buyers say that they are not going to wait another year to save up more, when they think mortgage rates will be higher in a year. Essentially, the message to them is put down less and buy today.

Most people in the market for (a $1 million house) can’t purchase it without a mortgage. … with higher rates, they’re less likely to pay as much for it

On the other end of the spectrum, what about the person who has no mortgage but owns a house worth more than $1 million. Even without a mortgage, there is clearly a challenge for them. Most people that are in the market for that house can’t purchase it without a mortgage. Because they are now facing a higher rate on their borrowing cost, they are less likely to pay as much for that house. More importantly, because they can get less total credit from a lender, they are less likely to pay the asking price. The big crime is that this person owns a house worth over $1 million.

The current mortgage environment is a prime example of how politicians have decided to interfere with the natural market and the result is some very strange rules that make winners of the banks and put higher costs on those who should have the lowest costs in a free market system.

Whether it is right or wrong, the end result is a situation that is built in Ottawa and the provincial capitals. It is one that has become misaligned in terms of borrowing costs and borrower risk. In the lending world, that is almost never a good situation.

Ted Rechtshaffen is president and wealth advisor at TriDelta Financial, 

Mortgage changes reduce chance of owning a home

By Tom Kmiec

Tom Kmiec, Conservative MP for Calgary Shepard, is a member of Parliament’s standing committee on finance.

Despite espousing to be great champions of the middle class, the Ottawa Liberals don’t seem too concerned with one of the most significant cost-of-living issues currently facing Canadian families: their mortgages.

That is the message the Liberals sent to Canadians when they voted down, on two separate occasions, motions before Parliament’s finance committee that would have studied the effects of the most recent, and drastic, changes to federal mortgage rules.

On May 30, I forced debate on my motion to study recently implemented mortgage changes at the finance committee. Refusing to speak to my motion, every Liberal MP voted down the proposal to study a defining issue facing middle-class Canadians.

Not satisfied with the Liberals’ refusal to take seriously the concerns of Canadians struggling with their mortgages, I tabled a second motion on June 13 — this time, asking for a new subcommittee to be created that would study these new mortgage rules. Again, the Liberals said no, but at least debated the issue.

Dysfunction in the housing market has become the favourite justification for governments looking to change mortgage rules, but what happens when politicians meddle?

In January, the Liberals, through the office of the superintendent of financial institutions, introduced a set of new rules. Among other changes, these rules introduced a mandatory stress test for all qualifying mortgages, meaning that homeowners would have to demonstrate they could accommodate a two percentage point increase in the amount they pay.

Six months into 2018 and the harmful effects of these mortgage changes have already been realized. A recent CBC article reported that more than 100,000 Canadians would fail the stress test, and that 50,000 Canadians would be blocked from purchasing a home.

Imagine tens of thousands of Canadians having homeownership yanked from their grasp. That is the reality that these changes have created. Canadians in every region of the country are feeling the pinch.

Data provided by Mortgage Professionals Canada, the national housing lenders’ industry association, indicates that up to 20 per cent more mortgages are being denied by big banks since these changes were implemented, and this huge dip in economic activity has caused the Bank of Canada to post the lowest mortgage growth in Canada since 2001.

History books tell us of the danger that can arise when governments neglect to enforce sufficiently stringent lending rules on financial institutions. It was under the last Conservative government that Canadian banks — with strict oversight — weathered the 2009 financial crisis better than any other G7 country.

However, regulation for the sake of regulation — or worse, misplaced regulation — is not good public policy. Regardless of the intentions behind these new mortgage changes, the impact has been catastrophic. Outside of the decimated real estate market, the far-reaching impact of these changes is also having an economy-wide effect, with as many as 150,000 fewer jobs predicted, according to Mortgage Professionals Canada.

The refusal on the part of the Liberals to study this issue should not be surprising. Over the past three years, Canadians have seen this Liberal government take an Ottawa-knows-best approach to nearly every issue — with the housing market as no exception.

The Liberals have introduced more than a dozen regulatory changes to mortgage rules in three years, which evidently are not achieving much in terms of improving affordability or stability in the market.

Without the benefit of a comprehensive study, the true impact of these rule changes may never be known. However, when market indicators show home sales plummeting by as much as 20 per cent, and huge segments of the population being forced out of the housing market, logic would indicate that further study is warranted.

That’s precisely what I have asked for: an opportunity to study the effects of the mortgage rules on Canadian families. Sadly, the Liberals aren’t in favour of getting more evidence.

Mortgage stress test is going to cause more than a ‘dip’ in the Canadian housing market: RBC

Canadian home sales have been falling on a year-over-year basis ever since a new mortgage stress test was implemented in January. And while many industry watchers had predicted the market would start to recover in spring, one economist says things may stay cool for awhile longer.

“It increasingly looks like the new stress test is causing more than just a temporary dip in housing market activity in the greater Toronto and Vancouver areas,” writes
RBC senior economist Robert Hogue, in a recent note.

Last month, sales were down 22.2 per cent and 35.1 year-over-year in Toronto and Vancouver, respectively. But there’s a reason that May’s year-over-year numbers are looking so dire, and it has everything to do with regulations that came into effect this time last year.

And while the market is taking longer to correct than originally predicted, Hogue writes that he isn’t worried about the current state of affairs.

“We aren’t overly concerned by what is becoming a more extensive market correction in two of Canada’s largest markets,” he writes. “At this stage, we still believe that neither is in a death spiral. Despite sharply lower levels of activity, demand-supply conditions (as depicted by the sales-to-new listings ratio) remain balanced.”


Bank of Canada’s mortgage ‘stress test’ rate climbs higher

Central bank’s rate for deciding if you can afford a mortgage is raised 20 points to 5.34%

As mortgages get more expensive with interest rates rising in Canada, the hurdle that some borrowers must pass is also getting higher.

The interest rate used by the Bank of Canada for mortgage stress-testing went up by 20 basis points Wednesday to 5.34 per cent from 5.14 per cent, where it had been since mid-January of this year.

The rate used has now gone up five times since last May, when it stood at 4.64 per cent.

The central bank’s rate is based on a survey of conventional five-year rates available at the big banks.

“The change in the Bank of Canada five-year benchmark rate not only means Canadians will pay more per month for their mortgage, it also means the amount Canadians can qualify for has diminished,” James Laird, co-founder of Ratehub Inc. and president of CanWise Financial, said in a release.

“This increase will put pressure on first-time homebuyers, who are the most financially strained Canadians entering the housing market,” he said.

Under new rules that came in force in Jan. 1, all home buyers have to go through the mortgage stress test.

The test is based on qualifying for the greater of either the Bank of Canada qualifying rate or the buyer’s contracted interest rate plus two percentage points.

“The idea behind [the test] is to make sure you can afford your mortgage at a time when interest rates are going up,” Cynthia Holmes, an associate professor and chair of the real estate management department at the Ted Rogers School of Management at Ryerson University, told CBC News in an interview.

“They want to make sure you can afford your mortgage with a good solid rate in place, not that you can only afford it if rates are really really low,” Holmes said.

Last week, several of the Big Banks boosted their posted mortgage rates.

What to Do as Mortgage Rates Are On the Rise?

What to Do as Mortgage Rates Are On the Rise?

Chris MacDonald

For many millennials, or those looking to become homeowners for the first time, the interest rate one will receive on the mortgage they lock in today can play a huge role in determining the state of one’s household finances for years to come.

Given new stress tests put in place by Canadian regulators looking to ensure the housing market does not become overheated and remains somewhat affordable for the working class, those who have managed to scrape together a down payment may still not be able to afford the higher rates one will need to be able to qualify for under the new rules.

Adding fuel to this fire, this week both Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) announced that they will be raising their benchmark interest rates as of this week, in response to higher borrowing costs reflected in a rising five-year Canadian Government Bond Rate.

While TD has committed to a 45-basis-point increase, Royal Bank has indicated it will be raising its benchmark by 20 basis points for its five- and 10-year rates, with its one and four year products seeing an increase of 15 basis points and its variable rate closed mortgages decreasing by 15 basis points.

For homeowners considering a variable rate mortgage as the way to go, consider other borrowers who have been hit with rising interest rates in recent years as central banks have begun to tighten.

While locking in a mortgage may now turn out to be a more expensive exercise, it appears the hiking schedule in Canada and the U.S. may be picking up speed, making future decisions even more costly.

Invest wisely, my friends.

Stress tests pushing one in three homebuyers to forgo home purchase: survey

A quarter of buyers compromised on the size of their home, while 18 per cent made concessions on its location

Naomi Powell

Tougher mortgage stress testing rules are pushing some Canadian homebuyers to lower their expectations for a new home and others to opt out of buying altogether.

In a sign of the ongoing role government intervention is playing in the market, one in three Canadian homebuyers said they had decided to forgo a home purchase in light of the new mortgage qualification rules that came into effect January 1, according to a new Re/Max survey conducted by Leger.

A quarter of buyers compromised on the size of their home, while 18 per cent made concessions on its location.

“It has definitely cut out the buying power of first time home buyers and prompted other consumers to rethink where and what they’re going to buy,” said Christopher Alexander, executive vice-president and regional director for Re/Max. “If you could afford a house at a certain price point and that became unattainable in the last 18 months, you’re probably looking at a condo. If you still want a house maybe you have to consider a different area.”

The new mortgage lending rules introduced by the Office of Superintendent of Financial Institutions (OSFI) require home buyers to prove that they can service their uninsured mortgage at the contractual rate plus two percentage points or the five-year benchmark rate published by the Bank of Canada.

They came on the heels of market-cooling measures — including a foreign buyers tax — unveiled by the Ontario government in April 2017.

Following these moves, sales volumes in the Toronto region slowed through the summer and fall and plummeted in the opening months of 2017 – particularly in comparison to the same period a year ago, when prices soared and bidding wars were commonplace.

The average residential sales price in the Greater Toronto Area was $753,747 in January and February, down 10 per cent from $834,144 a year earlier, according to the Re/Max Spring market trends report.

Meantime, prices in Vancouver rose to $1,051,513 in January and February up 11 per cent from $950,184 during the same period in 2017. And in Calgary, the average residential sale price was $481,775, up 1.4 per cent from $475,288 a year ago.

The OSFI stress test did not impact Western Canada’s major markets as much as other parts of the country, said Elton Ash, regional executive vice president at Re/Max of Western Canada. Nevertheless, a suite of new housing market interventions introduced by the B.C. government in February –  including an increased foreign buyer’s tax and proposed speculation tax – have remained a concern for buyers, he said.

“In recent weeks, the speculation tax has actually made some buyers hold off on purchasing which may affect the housing market in the next few months,” Ash said.

Though supply remains low in many regions, demand remains strong and markets are expected to strengthen across much of the country as we head into the warmer months, Alexander said.

“Pockets of the GTA had incredible price run-ups last year that weren’t sustainable,” he said. “I still think we’ll finish the year flat and sales and prices will rise toward the end of May.”

Canadian housing starts dipped to 225,213 units in March compared with 231,026 in February, as construction of urban buildings like apartments and condominiums decreased, the Canada Mortgage and Housing Corp. said Tuesday.

Construction on these housing types fell 7.3 per cent to 144,578 units in March – a drop that was partially offset by a 9.5 per cent increase in single-detached urban starts to 63,659.

BMO senior economist Robert Kavcic said the results were “firmer than expected,” noting that the 12-month average of 221,000 units was just off the strongest pace since 2008. While apartment and condominium activity declined, it still outpaces the construction of single family homes by a two to one margin.

“Indeed, this just reinforces the key message that residential construction activity remains relentlessly strong and stable in Canada,” he said in a note to investors.

In the Greater Toronto Area and Greater Vancouver Area, developers are “basically putting up whatever they can…and the markets are gobbling it up,” he added.

Albertans would be hardest hit by interest rate hikes, Royal Bank says

Mortgage debt in Alberta rose almost 30 per cent on average from 2010 to 2016

Rajeshni Naidu-Ghelani · CBC News 

Alberta residents are also holding more shorter-term mortgage debt than other Canadian households, according
 the RBC. (Reuters)

Households in Alberta will feel the most pressure from rising interest rates, because residents in the province carry the highest debt loads in the country, according to a new report from the Royal Bank of Canada.

Alberta residents would see the biggest increase in debt-service payments in Canada — over $1,200 a year on average — if interest rates rose by one percentage point, said Robert Hogue, senior economist at RBC Economic Research in a report on Tuesday. That’s the amount of money needed to make payments on the principal and interest on outstanding loans.

The Bank of Canada has already hiked interest rates three times since mid last year, raising the key lending rate by a total of 75 basis points to 1.25 per cent.

 “Households in B.C. and Ontario are also more indebted than the national average, but Albertans carry the heaviest debt loads,” Hogue said.

“A booming provincial economy and strong income gains between 2011 and 2014 emboldened households in Alberta to buy homes (sales growth averaged over 10 per cent per year in that period) and accumulate significant debt, leaving them with high debt loads when incomes dropped following the plunge in global oil prices.”

Hogue added that Alberta residents are also holding more shorter-term mortgage debt than other Canadian households, but higher-than-average incomes offer them “some breathing room.”

Higher incomes in the province are a “mitigating” factor, Hogue said as debt service payments accounted for over 15 per cent of disposable income in 2016, which is just a bit more than in B.C.

How much debt?

But on average, household debt in the province rose from $164,000 in 2010 to $192,000 in 2016, according to the report.

“These numbers include households who are debt-free, so actual outstanding balances for those carrying debt are even higher,” Hogue said.

Mortgages accounted for the majority of debt that Alberta households carried, with the average going up to $124,000 in 2016 from $96,000 six years earlier. That’s a nearly 30 per cent jump.

Meanwhile, debt-service payments in the province are already the highest among all Canadians at an average of $15,300 per household in 2016.

That compares to $13,700 paid by B.C. residents, and $12,600 paid by Ontario households on average. The overall average for Canadians in 2016 was $11,600.

“These amounts aren’t pocket change. In Alberta, for example, the $1,200 no longer available for spending on everyday goods and services — or saved for future consumption. It would exceed what households spend on entertainment ($1,000) or furniture ($800) each year,” said Hogue.

“Their debt-service bills will get bigger, and possibly sooner than elsewhere in the country, when interest rates rise. It’s bound to cause many households to spend more cautiously on other goods and services.”

This could potentially hold back economic growth more in Alberta, B.C. and Ontario than in other provinces, Hogue warned.

Canadian household debt as a share of income remained near a record high in the fourth quarter, according to the latest figures from Statistics Canada in March, as home sales fell in the previous month.

Meanwhile, markets are pricing in a nearly 70 per cent chance that the Bank of Canada will raise interest rates again in July.

Mortgage renewals in 2018: Prepare for nasty rate surprises


The era of pleasant surprises for people renewing their mortgage is done.

Years of falling interest rates in the aftermath of the 2008-09 financial crisis taught a generation of home buyers that renewing a mortgage is a chance to reduce your payments. Now, we’re heading into the first wave of postcrisis renewals at higher mortgage rates.

If you bought your house five years ago and chose a mortgage with the ever-popular five-year term, rate hikes since last summer mean your payments are headed higher on renewal. Competitively discounted fixed five-year mortgage rates today run from 3.19 per cent to 3.59 per cent, depending on your particular home and mortgage details. Five years ago, a comparable rate was 2.74 per cent. The lowest five-year rate widely available in the past five years was 2.44 per cent in mid-2016, according to RateSpy.com.

 David Larock of Integrated Mortgage Planners said he’s starting to hear from homeowners who are taking in this shift in rates. “I get e-mails from people once in a while to say, if you can get me my old rate of 2.49 per cent, I’d be happy to renew,” he said. “I have to break their hearts.”

Higher rates are just half the story. New mortgage-industry rules are complicating the process of taking your mortgage elsewhere if you don’t like the rate offered by your current lender. Vince Gaetano, a broker with MonsterMortgage.ca, said a lot of people seem to think the new rules applied only to first-time buyers. “Now, they’re coming up to their renewals and they’re saying, I had no idea this impacted me. I would have planned for this last year.”

 The new rules require buyers with a down payment of 20 per cent or more to undergo a stress test that ensures they could afford their mortgage payments at the greater of the Bank of Canada’s five-year benchmark rate (now 5.14 per cent) or the actual rate being offered plus two percentage points. People with down payments below 20 per cent already faced a stress test, but it was set at the five-year Bank of Canada rate and thus slightly less stringent.

For existing homeowners, the stress tests are a non-factor as long as they’re renewing their mortgage with their current lender. If they want to move the mortgage to a different lender, a stress test must be applied. Unless you can pass the stress test, you’re likely stuck with your current lender. Mr. Gaetano expects lenders, notably the banks, to use the new rules as an opportunity to become less competitive in the renewal rates offered clients who appear to be less creditworthy. Better rates may be out there, but these clients won’t be able to get them.

A recent column  looked at how people refinancing their mortgages to add other debts must also pass the stress test now. Refinancing is a popular tactic used by people who are getting overwhelmed by their debts. How popular? Mr. Gaetano said about 80 per cent of his clients who are up for their first mortgage renewal have in the past refinanced as opposed to simply renewing.

The biggest rate shocks will be felt by people who thought they were being prudent borrowers by putting down 20 per cent or more and thus avoiding the cost of mortgage-default insurance. This insurance makes a mortgage more attractive to lenders because the equity built up in the house means they won’t lose money if borrowers can’t repay what they owe.

That competitive 3.19-per-cent, five-year fixed rate mentioned earlier is for people who started with a so-called high-ratio mortgage, where the down payment is less than 20 per cent, and/or for those who have a mortgage that is less than 65 per cent of the current value of their home. Also, the purchase price had to be below $1-million. The best rate applies here because the mortgage is insured against default.

 Expect rates in the area of 3.39 to 3.59 per cent if you’re renewing a mortgage of between 65 per cent and 80 per cent of the home’s current value (for example, a couple that put down 20 per cent at the time of purchase several years ago) and/or had an original purchase price of $1-million and higher. The same applies to people who are refinancing when they renew.

If years of declining rates have reduced the motivation for homeowners to shop around for a mortgage deal, Mr. Larock expects that to change this spring. “If their costs are going up, a lot of people are going to be more inclined to see what else is out there.”

What to do about your debt and mortgages after the interest rate hike

The Canadian Press, Financial Post 

TORONTO — Many consumers will soon find their debt loads heavier now that Canada’s central bank and the country’s biggest commercial lenders have raised their benchmark rates by one-quarter percentage point.

The country’s biggest banks raised their prime rates after the Bank of Canad hiked its overnight lending rate Wednesday by a quarter of a percentage point to 1.25 per cent.

It’s a challenge for Canadians still struggling to cope with the record amounts of consumer debt they amassed after the 2008 financial crisis because lenders use their prime rate as a benchmark for setting some other short-term rates including variable-rate mortgages and lines of credit. A hike is good news for savers as the prime rate also affects interest rates for savings accounts.

If you’re contemplating how to best take advantage of the increased rates or avoid falling into further debt, personal finance expert and Ryerson University business professor Laleh Samarbakhsh shared her advice.

Q: Now that the rate has gone up, what financial choices should I be making?

A: With the interest rate increase, debt becomes more and more expensive. Before you do anything, you have to understand what kind of debt you have to start with.

We have good types of debt and bad types. Good types can include any investment that is made to contribute to progressing your future. For example, a student loan is a good type of loan because you are investing in your ability to make more money. At the same time, debt you have from real estate or your primary residence is considered a good type of debt because you’re accumulating equity.

Focus first on what is considered bad debt like credit card debt, lines of credit or any kind of debt with higher interest rates and no future investment. Pay off the debt with the higher interest rate first, but also consider what debt you have that is tax deductible.

Q: If I have some money in a Tax-Free Savings Account, but also some debt, should I pull out that money in the account and pay off the debt?

A: A lot of times people might consider borrowing from a lower debt to cover a higher debt or borrowing from a TFSA to make a payment. My recommendation is if you have some tax deductibility because of debt you have, keep it. As much as paying off debt is important, if you won’t be able to pay off all your debt, you can use the deductibility you have from some to save on taxes and create an income to pay off the high-interest or bad debt.

We have had a successful year on the investing market, so if an individual makes contributions to their TFSA and has a portfolio with a higher return of 20 per cent or 25 per cent, it makes sense to keep that because the advantage is no tax being paid in the TFSA.

Q: What should I do if I have been looking at buying a home or if I just bought a home and am dealing with a mortgage?

A: For individuals who care about their credit score and are applying for a mortgage shortly, consider your credit limit. The types of debt that have a credit limit should be paid off first to release your capacity.

The typical concerns after a hike are usually individuals with mortgages because those are the biggest debts people carry. My advice would be for individuals with variable mortgage rates to consider locking down a fixed mortgage rate.

Q: What should I do if I have no debt, but want to take advantage of the hike?

A: Saving is making even more sense now because savings accounts will have fairly higher interest rates, so if you have no debt, my recommendation is to start with capping your Registered Education Savings Plan contributions first because that brings you tax savings.

Once the RESPs are capped, I would also invest in a Tax-Free Savings Account. The interest you make is tax-free, so I recommend maximizing your TFSA contribution.

After that, there are lots of forums and markets for investment and you can consult with your financial adviser about what is best to invest in at the time.

Q: Some economists think we might see further interest rate hikes later this year. Should I act on those rumours now?

A: It’s hard to predict what is going to happen, but we know the decade of low interest rates are over. It’s important to be more careful with spending and what kind of debt we are taking on and how and what the plan for repaying it is.

If you’re concerned, take action sooner rather than later and don’t let it bring mental pressure to your daily life.

This interview has been edited and condensed for clarity and length.