SmartHomeOwners

TORONTO: Any savvy shopper knows a good deal doesn't last forever, and the modest interest rate hike announced this week presents an opportunity to guard against potential payment shock as we ease into more expensive borrowing.

``Because it's been so affordable to carry the debt for so long now, it hasn't been at the top of people's priority lists,'' said Scott Ward, a financial adviser at Edward Jones.

``So now that rates are going up, it's going to become a little less comfortable to carry that line of credit, or that mortgage, or that loan around.''

The Bank of Canada's decision to raise its key rate from an emergency low 0.25 per cent largely affects variable rate mortgages and lines of credit that are closely tied to bank prime rates, which now sit a quarter point higher than last week, at 2.5 per cent.

The central bank has also warned Canadians about the perils of racking up too much debt as they became accustomed to falling rates over the past three years.

``This signal that's it's going to become a little less comfortable now, and it might become even more uncomfortable in the future, now might be the time, while it's still not unbearable, to buckle down and pay it off,'' Ward said.

The quarter point hike amounts to about a $35 increase in monthly payments for a $250,000 mortgage with a 25-year amortization.

The bank's next opportunity to raise its key rate is scheduled for July 20.

As long as mortgage holders and other borrowers haven't added too much debt to their balance sheets, they should be able to withstand the modest rate hike, Ward said. But, he added, they should be proactive about paying down debts or increasing savings.

``See where you can employ some of the money to help reduce those costs...what sacrifices you can make in terms of your monthly living to help reduce those costs,'' he said.

Rob Hafer, regional manager at mortgage brokerage Invis Inc., says borrowers should use this time to take precautions to guard against future payment shock if rates rise significantly, he said.

Hafer said homeowners with variable rate loans should think about putting extra cash, like an inheritance, tax refund or a work bonuses directly toward their mortgage.

Another prudent idea is to set payments at a higher rate than the current interest amount, in order to pay down some of the principal. That way, when rates go up, consumers won't have to start kicking in more of their income, instead, the amount going toward the principal will fall.

Hafer said its still a good time to consider taking a variable rate mortgage because rates are low and have a fair way to go before equalling the average five-year fixed rate.

And while borrowers might be focused on the effect of interest rate hikes on their debts, savers will benefit from increased interest rates, as returns on GICs begin to improve. Ward said now is a good time to put some money away to invest when interest rates rise further.

``We're getting to a point where eventually they should look a lot more attractive than they have in the past.''