Yesterday, Bank of Canada governor Mark Carney expressed continued concern that Canadians are using too much “cheap” money. In other words, the percentage of borrowed money compared to income has risen to a point that an increase in rates may be inevitable to “cool” this trend.

Naturally, an increase in interest rates will reduce the demand for new borrowed funds, but it could also create higher borrowing costs for those with existing loans. A family with a $300,000 floating-rate mortgage will experience an increase in monthly payments of about $160 per 1% increase in rates. Given that mortgages are usually paid with after tax dollars, it will take about $3,200 in increased annual earnings to cover the extra mortgage costs.

When (not if) interest rates start to increase, many people will be affected. If homeowners today are having trouble making ends meet, increased rates could be devastating.

I don’t believe that we will see any noticeable shift in rates before the fall of 2013, but I also think it would be prudent for homeowners to have this in mind now. There is no reason to have ANY consumer debt. If you have it, get it paid off - and don’t use plastic unless you are certain that you will pay the account in full when it comes due.

Every mortgage lender has pre-payment options that allow you to reduce your capital balance without penalty. It’s always in your best interest to use these options as often as you can. When your mortgage rate increases (and it will), a lower capital balance will help to minimize interest-related increases in your monthly mortgage costs.

Sincerely, John Deakin