Tips to prepare for future interest rate hikes from financial adviser

A possible 0.25 per cent increase in interest rates is not significant, but people need to start planning for future increases, financial advisor Susan Daley says.

Daley, who works at PWL Capital in Waterloo, Ont., said people with variable rate loans such as home equity line of credit, car loans and those renewing their fixed-rate mortgages will be affected.

"That's a very small percentage. But what this does mean is it indicates that rates might increase even further down the road, so maybe a whole percentage over the next year or two," she told Craig Norris, host of The Morning Edition on CBC K-W on Tuesday.

Immediate steps they can take to prevent harm to their financial situation would be to review all debt — variable and fixed — and come up with a payment plan. People can also consider consolidating loans, making more payments on the principal or converting lines of credit into a mortgage.

Things to review before taking out a loan

Daley has some advice for things to consider before signing the form to take out a loan.

Consider how long you can keep up with payments

People may be able to keep up with payments now, but things can change in five years.

Before moving forward, Daley said ask yourself, "What happens if rates increase one or two percent? Are you still able to afford that loan on an ongoing basis?"

She also said people tend to think their income will increase in the future, but being conservative is better for planning.

Daley suggested using your current income while thinking of a payment plan for long-term.

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Consider the reason why you want the loan

Daley said it's important to be clear about the reason to take out a loan and consider whether it will lead to a better financial position.

She gave renovations as one example of an expense that needs careful review. Some people think it will improve the value of the home, but Daley said they might not get back the full value they've put into it.

"You can enjoy the renovation, but don't necessarily view it as you're going to get all of your money plus some back," Daley said.

She advised taking out a loan to fund a lifestyle is likely not sustainable long-term.

"You're paying the bank to access that money, so that's money out of your pocket if you are taking out loans," Daley said.

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Not all bad news

However, savers will be in luck if the interest rates do go up.

"For individuals who are saving, increasing interest rates means that when they're putting their money into a GIC, or savings account or even bonds in the market, it means they're going to get a higher rate for their money and be able to save more down the road," she said.