Get debt under control before interest rates increase, expert advises

Islanders are being advised to think twice before taking on too much more debt after the Bank of Canada hinted at increasing its interest rate as early as this summer.

The central bank left its key target for the overnight rate unchanged at 1.25 per cent, but said in a statement accompanying its decision that developments since April reinforce its view that "higher interest rates will be warranted to keep inflation near target."

Walter MacKinnon, vice-president of MNP, a consumer insolvency company in Charlottetown, said higher interest rates will make debt payments more difficult to make.

'Don't accumulate a lot of debt'

"It's like an elastic band," he said in an interview on CBC News: Compass. "When you stretch it as far as it can go, and you're comfortable there, and someone says well stretch it a little bit more with this increased interest rate, it might not stretch any more."

MacKinnon said based on surveys by MNP about 45 per cent of Islanders can't handle an unexpected major expense. He advises Islanders to get their debt under control now, "and if you don't have a lot of debt at the moment, don't accumulate a lot of debt."

"Most people are carrying too much debt," he said. "They're only a couple hundred dollars away in most cases from paycheque to paycheque."

Effect on mortgage rates

MacKinnon said credit debt is not necessarily a problem as long as there is a plan to pay it off in a timely manner.

He said a hike in interest rates will affect not only homeowners with variable rate mortgages, but also those with fixed rates.

"They might not be in trouble right now but when the mortgage renews in four or five years time and the rate has gone up  two, three, four points, then it's a problem."

The Bank of Canada's next interest rate decision is slated for July 11.

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