Here’s how inflation impacts your mortgage and debt levels

Mortgage rates are rising quickly after almost two years of no movement from the Bank of Canada. It seems the central bank went from zero to 100 very fast, so it’s natural to be a bit worried about the future for rate hikes, especially as a borrower. The overnight rate sits at 1.5 per cent but we expect it to move higher in July. You might feel a bit blind, and like you have no idea where the bank is leading you. The truth is even though many borrowers are worried about mortgage rates increasing, rate rises themselves are not the most of our concerns. Instead, we should focus on the cause of these rate increases and get to the bottom of this issue, which is inflation. This isn’t to minimize borrowers’ very real concerns about their payments, but to help you better understand the causes and possible solutions. Here’s what you need to know about how inflation impacts your mortgage!

Why is inflation the bigger concern?

So, why do we say that inflation is generally a bigger concern than rate increases? To start, borrowers have undergone the stress test to ensure they can handle future rate hikes. Even though payments are increasing, borrowers can endure them. Plus, rates are rising from ground zero, meaning they are still low. The bigger concern is inflation. Inflation is at record highs — 253 per cent above the 20-year average. It’s inflation that is causing the bank to aggressively raise rates to combat it. The thing is, inflation is going to stick around for a while, thanks to the war in Ukraine and lingering pandemic impacts. This also means mortgage rates will continue to rise and make borrowing more expensive. 

Inflation may reach its peak during the summer, but there are also concerns about how quickly, or slowly, it might go down again. Before the BoC stops rate hikes, inflation must first reach its peak, THEN start its descent. Given today’s trends, this could take a year or more. As inflation takes its time to slow down, the resulting rate hikes could make things tough for borrowers.

Tips for curbing spending and debt

The more consumers hear about inflation, the more they spend now to try to beat price increases down the line. This leads to more inflation in the here and now. For example, gas, food, renovations, and everything else is becoming increasingly expensive. Understandably, consumers are thinking they should get ahead of the game and spend their money now, so they don’t have to pay more for the same things in one year. In reality, this just inflates prices even more. We don’t want to stop inflation, but we want to lower it back to the two per cent threshold the bank promotes. Part of curbing inflation is to reduce spending. How can you do that? 

It’s important to prioritize your spending and emphasize the things you need to use your money for right now. Mortgage payments, bills, and other household essentials should come first. Be mindful about extra spending after that. Spending less leads to a slowdown in market activity, lowers demand, and eventually contributes to lower inflation. This will also save your household money. Should we experience a recession, being financially prepared with savings can be a big help. As for dealing with debt, we’re here to help. Whether that be debt consolidation or refinancing, or using budgeting apps, we can help you get a handle on household debt. The best thing you can do is master your finances and prioritize how you spend your money during uncertain times.

Inflation and rising interest rates can cause big disruptions to your daily life, including your mortgage. If you need help figuring out how to best deal with these changes, we encourage you to contact a broker. We are able to provide you with the best solutions so you can navigate your mortgage in this economy with confidence.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770, or contact us here.