How to keep your debt down as interest rates go up

This story is part of a series we're calling Debt Nation looking at the state of consumer debt in Canada.

As interest rates rise, so does Canadians' anxiety over their debt.

For close to a decade, homeowners have enjoyed rock-bottom interest rates. However, that's slowly changing. This week, the Bank of Canada raised its key rate by a quarter-point for the fifth time since July 2017, pushing up borrowing costs for consumers.

To put it into perspective, mortgage rate-comparison siteRateHub crunched the numbers. It found that beforeJuly 2017, the lowest available variable-mortgage rate was just 1.75 per cent. After this week's increase, it jumped to 2.7 per cent. The rate change translates to $186 extra in monthly payments on a $400,000 mortgage.

It's expected rates will continue to rise next year at a time when Canadians have piled up near-record levels of household debt.

Here, financial experts offer their advice on how to not let your debt get you down.

Consolidate

If you're facing sky-high interest rates such as 20 per cent on your credit card debt youmay be able to lower your monthly payments by consolidating your debt into one loan at a lower rate.

Homeowners can typically secure some of the lowest rates availableby borrowing against the equity in the home. Their two options are refinancing their mortgage or getting a home equity line of credit.

But these loans come with some caveats: They includelegal and home appraisal fees which can add up to hundreds of dollars. There's also a penaltyfee for breaking a fixed mortgage early.

• Debt Nation: CBC News's look at the state of consumer debt in Canada

Financial adviser Allan Tran suggeststhat people in need of smaller, short-term loans consider an unsecured line of credit, also an option for non-homeowners. The interest rate will likely behigher, but there are typically no added fees.

"If it's short-term borrowing, so I only need $5,000 and I can pay it off because my bonus is coming up at the end of the year, an unsecured line of credit is the way to go," said Tran, an adviser with Meridian Credit Union in Hamilton.

Pay down debt

Financial planner Rona Birenbaum warns that consolidating loans only makes sense for people with a solid financial plan.

"Unless they change their spending habits, within a few years, that credit card will be run up again," says Birenbaum, with the firmCaring for Clients in Toronto.

She suggests a more effective way to wipe out debt is the"avalanche" method, where people pay down loanswith the highest interest rate first.

"When they know they're paying a lot of interest, they're more determined to get it paid off."

Tran cautions that if you're using savings to pay down debt, you should stillset some aside for emergencies such as surprise home repairs.

But if you do have extra cash available, he recommends also putting some toward your mortgage, as long as you don't incur a penalty. The move could potentially save you thousands of dollars over the mortgage's full term.

Tran says the faster you make extra payments, the more money you'll save. "Interest is calculated on a daily basis. If you can afford it today, why not?"

Make more money

If you're already cash-strapped, where do you find the extra money to pare down your debt?

Birenbaum suggests making a list of your expenditures to figure out where to cut that fat.

"Identify where your money's going," she said. "When we get our clients to actually crunch the numbers, they're universally blown away by how big the number is."

If you find you can't cut much from your expenditures list, it may be time to search for another income.

Many people don't have time for a second job, but thanks to the power of the internet, there are other ways to generate extra cash, such as by selling unwanted furniture on Kijiji or even renting your car.

Sean Cooper gained attention in 2015for paying off his $255,000 mortgage in just three years. To generate extra cash, he lived in his basement and rented the rest of his Toronto home.

Cooper understands that's not practical for most people, but suggests with online services like Airbnb, homeowners can rent out rooms or their entire house for short periods, such as when they go on vacation.

"There's definitely ways you can be creative about it. You don't have to be a full-time landlord," says Cooper, author of the financial self-help bookBurn Your Mortgage.

Shop around for a mortgage

Many people haven't yet felt the full effects of recent rate hikes because they have a fixed-rate mortgage the most popular type in Canada.

When it comes time for renewal, Cooper recommends shopping around for the best interest rate.

"It's so easy to just sign the renewal papers, but you're probably costing yourself a tonne of money."

Birenbaumsuggests consulting a mortgage broker who, for no fee, will do the shopping for you to try to find the best deal.

"It's both time-saving and money-saving."