Debt and cash management take priority as interest rates set to soar

Customers with unsecured lines of credit or home equity lines of credit worry about increased monthly payments or more money spent on interest, as do those with variable rate mortgages, explains an advisor.Rawpixel/iStockPhoto/Getty Images

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The stage is set for the cost of servicing certain types of debt to rise significantly as the Bank of Canada plans to aggressively raise interest rates this year.

This causes many people to worry about the impact of higher payments on their cash flow. They, in turn, look to their advisors for advice and strategies to ensure they are prepared for their changing debts.

Overall, Canadians have a significant amount of outstanding debt. Statistics Canada reported that household debt as a share of household disposable income reached its highest level on record in the fourth quarter of 2021, with Canadians ahead $1.86 for every dollar. From $50 billion of household debt in the quarter, more than $46 billion was related to mortgages.

A recent MNP Debt Index survey conducted by Ipsos also showed that more than half (55%) of Canadians, including 45% of those who rate their financial situation as “excellent”, are worried about the impact of rising interest rates.

From a personal debt perspective, many people risk seeing their future plans negatively affected if interest rates rise by a few percentage points, says Stephanie Holmes-Winton, founder and managing director of CacheFlo Inc. in Halifax. , which offers e-learning services and behavior-based tools for advisors and clients.

“Customers could stop their [registered retirement savings plan (RRSP)] Where [tax-free savings account (TFSA)] contributions. They might cash in things to deal with short-term cash flow issues,” she says. “All of this has a really horrible long-term effect on their financial scenario.”

Woody Yang, a certified financial planner and advisor with BlueShore Financial Credit Union in Vancouver, says that while many customers are well positioned to weather interest rate hikes, those with unsecured lines of credit or lines Home Equity Loan Holders (HELOC) worry about increased monthly payments or more money for interest, as do those with adjustable rate mortgages.

“I don’t think everyone is prepared. Many customers probably live in that perfect bubble of the past two years [in which the] “The stock market is doing well, interest rates are low and we are able to borrow more money,” she says.

In this capacity, Ms. Yang worked to prepare clients for debt. Specifically, she encourages them to stress test by making higher payments now. This gives them an idea of ​​what their cash flow will look like as interest rates rise further.

Reduce expenses and consolidate debt

Other strategies she uses include determining if clients are able to reduce discretionary spending to free up additional cash and considering opportunities to restructure their debt to better manage payments and reduce overall interest. paid. Ms. Yang is also looking to find out if there are ways for clients to increase their income.

“We have to be very proactive in dealing with the changing environment and implementing the strategies discussed with a counselor to try to stay ahead of the change,” she says.

Although rising interest rates and the higher cost of gas and groceries are beyond clients’ control, Daniel Evans, an investment advisor and certified financial planner at Money Coaches Canada Inc. in Vancouver, says that advisors can help show the impact of these expenses on a day-to-day basis. daily cash flow and establish a plan to allocate money for raises.

The first step is to have a clear picture of income and expenses before considering scenarios that include higher interest rates. “Then we have a conversation about how to subsidize some of these changes. So customers are already aware of what’s going on before it actually happens,” he says.

Evans says that can mean cutting back on discretionary spending as well as changing their savings strategy — while still contributing to a TFSA or RRSP — to pay down their debt if necessary.

“Maybe in this environment we’re turning away from those investments,” he says. “Just put a little more on the mortgage or the debt, not only because we have a choice, but we might have to.”

Check in as ‘financial dragons’ come out

Daniel Frost, Financial Advisor and Frost Group Certified Cash Flow Specialist at Raymond James Ltd. in Medicine Hat, Alta., says Canadians are already facing several challenges this year, from carbon tax hikes to rising mortgage rates affecting those due for renewal.

“It’s not just interest rates. There are a lot of financial dragons coming out of the woodwork that are going to put a few people in a bad spot,” he says.

Mr. Frost is dedicated to ensuring that indebted clients are as efficient as possible in servicing them. For example, using a HELOC, if available, to consolidate multiple sources of higher interest rate debt.

In cases where there are multiple types of debt, focusing efforts on the lowest balance is a short-term win that can also provide customers with excess cash flow to begin tackling higher balances, says -he.

Meanwhile, Ms Holmes-Winton says advisers should aim to build debt management into the plan.

This should include proactive conversations with customers – even those who seem unaffected by the current environment – ​​and regularly collecting and updating data on their debt so that it is accurately reflected in their records. It’s also important to check debt-to-income ratios annually to make sure clients are on track.

Customers who may have seemed fine in the past with their debts could be at serious risk now because higher interest rates, in addition to runaway inflation, are of concern, Ms Holmes-Winton says.

“[Debt] just needs to be managed, processed and part of the overall strategy,” she adds.

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