IN-DEPTH: How Canadians Can Survive Tough Times Amid Rising Interest Rates

A customer shops at a grocery store in Montreal in a file photo. (The Canadian Press/Paul Chiasson)

Although this week’s announced interest rate hike by the Bank of Canada (BoC) will make things even tougher for Canadians amid rising mortgage rates and tight budgets, there are a number of ways people can ride out this period and manage their finances.

“One thing Canadians can do is make a budget plan. Do not get caught off guard. Make trade-offs to cover essentials,” Canada’s first Parliamentary Budget Officer Kevin Page told The Epoch Times.

On July 12, the BoC raised its key interest rate by another 25 basis points, from 4.75 percent to 5 percent, bringing it to the highest level in over 20 years.

According to Mr. Page, many Canadians will find their budgets more stretched throughout 2023, higher mortgage rates will “sting” borrowers, and those seeking credit for new purchases will be “surprised how [much] more expensive things are when purchased via debt financing.”

Cut Spending, Rent Out Rooms

Ian Lee, an associate professor at Carleton University’s Sprott School of Business, said homeowners’ best moves would have been to switch to fixed-rate mortgages in early 2022 when it was anticipated the BoC would start raising interest rates.

“You lock in for as long as you think rates are going to go up, which many Canadians did, as the bank reported that a large number of Canadians flipped from variable to fixed about a year ago,” he told The Epoch Times on July 10.

But for homeowners who “gambled that [rates] weren’t going to go up, and gambled wrong,” Mr. Lee, who was a mortgage manager with BMO in the 1980s, said they have several options to deal with higher mortgage payments.

“First and foremost, you postpone discretionary spending. That’s just a reality,” he said. “So you’re not going to do the renovation, you’re going to cancel your holidays, and you’re probably going to cut back on going to restaurants. Is it fun? No of course not, but it’s a good solution.”

Mr. Lee also suggested that homeowners bring in extra income by renting out a room in their home, especially given Canada’s housing crisis.

“You can pull in another $500 or $700 a month. Your house is an asset, and if you’re willing to sacrifice a little bit of property for a college or university student, it works for some people. It’s not for everybody, but it’s an option,” he said.

In the worst-case scenario where someone is unable to afford mortgage payments, Mr. Lee said they should consider the “painfully obvious ultimate solution” of selling their home, given the alternative of having the bank foreclose on them.

“It’s far better that you sell the house and protect your credit rating. Because if the bank forecloses on you, then that’s on your credit rating, and that’s really, really bad,” he said.

“They’re not going to let you live there for a year without making a payment. They can accommodate you to a point by deferring payments. They can do things at the edges, so to speak, but they’re not going to actually [let you] live in that house for one year or two years with zero payments. They will foreclose.”

Modify Mortgage Rates

Jack Favilukis, associate professor at the University of British Columbia’s Faculty of Commerce and Business Administration, said the Canadians most impacted by higher interest rates are those with mortgages coming up for renewal within the year, as well as those considering buying a house.

Mr. Favilukis predicts interest rates will stop rising within a year and then begin falling, which means people with mortgages coming up for renewal “may want to switch to variable mortgages temporarily to wait out the rate hikes, then switch back to fixed mortgages in a couple of years.”

“Alternately, they can get a fairly short-term, one to two-year fixed mortgage now, then renew when rates are lower,” he said. “This involves some risk, but it is justified if the market turns out to be right.”

Mr. Favilukis said homeowners who are “desperate to buy” should opt for a short-term or open mortgage and then switch to closed when rates are lower. “For those not desperate to buy, just wait a year or two for rates to fall and buy then.”

Mr. Lee also agrees that the BoC could start cutting interest rates as soon as the spring of 2024 if inflation continues to fall.

Mr. Page said when the central bank sees a planned slowdown of the economy and Canada’s inflation rate returns to its target of around 2 percent, “we could see policy interest rates dropping within a year.”

Shop for ‘Loss Leaders’

While the BoC’s interest rate hikes are expected to further cool inflation, which fell to 3.4 percent in May from a high of 8 percent in June 2022, food prices remain stubbornly high.

Sylvain Charlebois, a professor at the Dalhousie University and senior director of the Agri-Food Analytics Lab, said Canadians looking to save money on food need to look at “where you’re shopping and when you’re buying.”

“Try to shop when you can get lots of discounts. And typically you would find discounts early in the week because grocers want to get rid of inventories. Even on Sunday, sometimes you actually see some good deals,” he said. “And don’t necessarily boycott smaller, independent stores. They actually have good deals at times.”

Mr. Charlebois said that compared to a year ago, food items located in the centre of grocery stores are by comparison cheaper than items on the periphery. He said these are good places to find “loss leaders”—items grocers sell at a loss in order to entice people into the store to buy various high-margin products.

“Costco has the classic $1.50 hot dogs in the front of the store, and then I would say pasta and sauces could be a loss leader. They can get you in there to buy other things, but if you’re disciplined, if you’re careful, you can actually save some money,” he said.