How we plan to adapt to a 50% increase in mortgage payments while pursuing financial independence.
Over the course of 6 months, the Bank of Canada has increased interest rates five times. As a result, the overnight rate is now 3 percentage points higher than it was on March 1st of this year.
So what does this mean for Canadians?
Well, if you have large amounts of money sitting in a savings account, you may be in luck. But for many of us, it means life will become more expensive (if it hasn't already).
While those with fixed-rate mortgages may not yet be feeling the effects of higher interest rates, others (including us) have seen their mortgage payments increase dramatically.
Since we have variable rate mortgages on both of our properties, our mortgage rates have jumped in step with the overnight rate, driving our monthly payments up by nearly 50%.
And while the fact that interest rates have increased did not come as a total shock (they have been at historically low levels for years), it still comes with a cost.
Our budget category once known as "extra savings", the money we set aside on top of our retirement contributions each month, has more or less been eliminated for the time being.
So the question now becomes, what happens next? What do we do if there is another rate hike?
Since most of the "buffer" we had built into our budget for something just like this has now been used up, any further increases to our mortgage payments will need to be worked into our budget.
At that time, we'll be faced with the difficult decision of reducing our savings contributions or cutting back on our spending.
If that time comes, we'll have to make some tough decisions.
We've enjoyed some of the extra spending money we've been able to build into our budget over the past few years, but financial independence still remains a top priority.
So while reducing our retirement contributions remains an option, we aren't likely to use it unless absolutely necessary.
Instead, we may need to use this as an opportunity to refocus our energy on the less material things in life that bring us joy, or as a chance to sharpen those budget-savvy skills we've relaxed over the years (bring back the coupons and at-home dinner parties!).
This experience has reminded us just how valuable financial independence is - and not just for the ultimate end goal of actually reaching it.
When you build a life around a budget that needs to accommodate a high savings rate, you inherently build resilience into the system. Instead of your worst-case scenario being unpaid bills and serious financial trouble, it becomes a slightly lower savings rate.
Thanks for reading! If you enjoyed this article, consider reading: The Power of Perspective: is your money mindset getting in the way of success?
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