The interest rate hikes made by the Bank of Canada over the last two years have caused short-term rates to increase significantly on things like loans, and mid-to-long term rates for both mortgages and savings programs. So, what exactly does that mean? Essentially: personal loans and mortgages are more expensive to maintain, but returns on high-interest vehicles like GICs or High-Interest Savings Accounts have climbed with rates as well.
How can I stay on track with my investments?
The silver lining of interest rate increases, is that the interest rate of return goes up in relevant investment vehicles as well. This means any funds you have set aside in GICs or High-Interest Savings Accounts will start to grow quicker than in the recent past. With that being said although these returns have increased, their rate of return may not match the current rate of inflation. In order to protect yourself against inflation, you may want to consider saving a portion of your money in investments like market-linked GICs or mutual funds that may better protect you against inflation-related fund depletion. Whether you prefer to play it safe and take advantage of rising rates of return, or have more appetite for risk and are looking to offset the rate of inflation that often accompanies rate hikes, it’s always a good idea to review your goals and your portfolio with your advisor. They can take stock of market conditions and how it may impact your current financial goals, and put together a plan that makes you feel confident about your path forward.
How will rising interest rates impact my loans?
The most immediate impact from rising interest rates can be seen in any variable rate product such as a line of credit or a mortgage. For someone who owes $100,000 on one of these products, a 25 basis point increase in interest rates translates to a $250 annual increase in borrowing costs.
With forecasts ranging from 50 to 150 basis points expected increases over the next 18 months that same borrower could face $40 to $120 increase in monthly interest charges. For the borrower, that means either coming up with additional funds every month, or in the case of a mortgage not paying down your principle as quickly as you would at lower interest rates.
*This is just an interest calculation that does not include principal payments
How will this affect my mortgage and how can I prepare?
Mortgages are especially vulnerable to interest rate increases. Their large outstanding balances ensure that even minor changes to rates can amount to significant differences in principal and interest payments.
By doing the following, you can feel confident that changes to your mortgage rate won’t interfere with your long-term financial plans:
- If you have a variable rate mortgage, consider increasing your payments. As interest rates climb, less is paid towards the principal, and more towards the interest, on variable rate mortgages. Left unchecked, rate increases can leave you owing more at the end of your mortgage term than you initially intended. You can make sure this doesn’t happen to you, either by increasing your monthly payments, or by switching into a fixed-rate alternative.
- Consider the benefits of a fixed-rate mortgage. They offer consistent interest rates that will remain unchanged for the duration of the term, and peace of mind from knowing that big market movements won’t upset your homeownership plans.
- It’s worth spending time with your lender to evaluate the variable market cycle. It’s always better to make a conscious decision to do nothing, rather than making no decision at all. If you can afford it, it may be beneficial to increase your payments to ensure a lower renewal rate. Your payments could increase on a higher principle than you’re expecting, and not altering your monthly payments could have long term implications to the total amount of interest you pay over time. Long story short: if you don’t increase your monthly mortgage payments, you could be looking at a longer repayment timeline than you originally thought.
Is now a bad time to buy a home?
At the end of the day, these rate hikes will limit how much money you can borrow against a mortgage and increase the overall cost of borrowing that money from the bank. Effectively you’ll be able to afford less home with the same down payment. Although this is less than ideal, we would expect that increasing interest rates may dampen home prices in the near future. Interest rates are not the only thing that impact home prices but we’ve seen a slow down in sales activities and early signs of modest price decreases that would make new home purchasing potentially more affordable. For anyone considering a home purchase or upgrade make sure that you can afford both the rates today and the rates that could potentially be 1-2% higher at your next mortgage reset.
We’re here to help.
If you’re still unclear what this could all mean for you, connect with one of our advisors. We’re on standby to help you make sense of these rate hikes and feel confident about your finances. Call us at 1.888.517.7000 or book an appointment online.
