WHAT DO HIGHER INTEREST RATES MEAN FOR YOU?
The Bank of Canada’s benchmark overnight rate increase in July – its first since 2010 – followed by another in September, has ushered in an optimistic economic outlook. But it has also raised concerns that we may finally be leaving the era of cheap money behind.
The economy is showing solid growth
The Bank of Canada is pointing to broadening economic strength (and with it inflation risks), an upswing in employment and a healthier global economy as key reasons why it felt it was the right time to start raising interest rates.
Whether you’re a homeowner, investor, saver or borrower, higher interest rates have implications for your financial life.
If you have a mortgage or other debt
How and when interest rate increases will affect you depends on the kind of debt you have. If you have a fixedrate mortgage, you won’t feel the impact until renewal time. Even then, you might find rates still affordably low.
If you have a personal line of credit, expect your interest rate to move with your lender’s prime rate. And, while the size of your payment won’t necessarily change if you have a variable-rate mortgage, more of the amount will go to pay interest.
While a small uptick in rates might not concern you, will that still be true if more hikes follow? Discuss stress-testing your current or planned debt with your advisor and ensure you’re comfortable with higher interest costs.
Look for opportunities to save interest by paying down what you owe so you’ll have less debt to cover if rates rise further. Reducing debt is like earning a risk-free, guaranteed rate of return that’s often superior to holding cash or conservative investments, especially if you’re in a higher tax bracket.
If you own – or are looking to own – real estate
The consensus view from housing experts is interest rates would have to increase substantially for real-estate prices to be impacted in a major way. That’s particularly the case in our area where foreign buyers and speculators are less deterred by rising rates.
On the other hand, firsttime buyers could suffer a real dent in their purchasing power – or be pushed out of the market altogether – should interest rates continue on an upward path. And the additional stress test for uninsured mortgages proposed by the Office of the Superintendent of Financial Institutions (OSFI), whereby lenders have to ensure borrowers can afford their loans even if interest rates were two percentage points higher than the mortgage rate being offered, will have an additional negative impact.
If you hold stocks and bonds
For investors, the consequences of rising interest rates can be a mixed bag. An inverse relationship between prices and yields means when rates are expected to rise, bond values generally fall. But they can still make sense for your portfolio, both for the predictable income they’re able to generate and their diversification benefits.
For stocks, the impact of rising interest rates is less predictable. Higher rates often go hand in hand with a stronger economy. That’s good for corporate profits and equity values. That said, if rates jump too far, too quickly, it can choke off growth prematurely and shift the stock market into reverse.
Equities, which rely on their dividends to attract investors, may struggle the most since their payouts lose some of their edge as interest rates rise.
If you own foreign stocks, keep in mind a stronger loonie can lower your returns when measured in Canadian dollars.
If you hold cash
Interest rate increases are a positive for cash and cash equivalents like savings accounts and GICs. Look for high-growth products that have a degree of flexibility. Blue Shore Financial’s Jump Rate 18-month term deposit offers 2.40% until November 10, and lets you jump to a different non-redeemable term deposit should rates go up.*
It’s time for a fresh look
How prepared are you for higher interest rates? Now’s the time to take a fresh look at your finances to ensure you’re properly positioned for the opportunities and risks ahead.
*Rate subject to change. Offer conditions apply.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice. Mutual funds and other securities are offered through Credential Securities Inc. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.