The Bank of Canada’s recent decision to hike its benchmark rates might have left consumers even more pressured with ever-rising costs. Fortunately, brokers are ideally placed to help their clients manages their burgeoning debts and mortgage loads.
For brokers with clients who are contemplating how to best take advantage of the increased rates or avoid falling into further debt, personal finance expert and Ryerson University business professor Laleh Samarbakhsh shared her advice in a recent interview with The Canadian Press.
Samarbakhsh emphasized that before anything else, clients have to understand what kind of debt they have to start with.
“We have good types of debt and bad types. Good types can include any investment that is made to contribute to progressing your future. For example, a student loan is a good type of loan because you are investing in your ability to make more money. At the same time, debt you have from real estate or your primary residence is considered a good type of debt because you’re accumulating equity,” Samarbakhsh explained.
“Focus first on what is considered bad debt like credit card debt, lines of credit or any kind of debt with higher interest rates and no future investment. Pay off the debt with the higher interest rate first, but also consider what [debts are] tax deductible.”
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For those who are either considering a home purchase or just finished buying a home, brokers should highlight the importance of considering credit limits.
“The types of debt that have a credit limit should be paid off first to release your capacity,” Samarbakhsh said. “My advice would be for individuals with variable mortgage rates to consider locking down a fixed mortgage rate.”
Crucially, a hike is good news for savers as the prime rate also affects interest rates for savings accounts.
“If you have no debt, my recommendation is to start with capping your Registered Education Savings Plan contributions first because that brings you tax savings,” Samarbakhsh advised. “Once the RESPs are capped, I would also invest in a Tax-Free Savings Account. The interest you make is tax-free, so I recommend maximizing your TFSA contribution.”
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