Responding to interest rates
Dear
Money Lady Readers,
The Canadian Prime rate sits at 7.20% and the American Prime rate is 8.50%. Young Canadians have never seen interest rates this high. It was simply not something we had to be concerned with for the last 15 years. We enjoyed record low interest rates that helped fuel the propensity to buy more, upgrade homes many times over, buy fancy cars and spend more than we should. And why not, money was cheap. We came out of the 2008 Financial Crisis feeling wounded and broken and the government responded by instigating a series of cuts to the federal funding rates which in turn led to lower interest rates as a fallout to the 2009 recession. It seems, no one nowadays remembers interest rates prior to the 2008 Crisis were about where they are now, at 4%-6%. I ran a mortgage finance firm at the time and remember that there was a very low demand to borrow, and fixed mortgages were given out at 5+% across all Canadian banks.
As we moved into 2009, the bond prices rose, and the central banks eased up even more on monetary policies. The low rates were initially designed to promote small business expansions, but instead over time created a huge runup in equity and housing prices. Thanks to the Bank of Canada low rates continued as we were lulled into a false sense of security for the next decade with easier lending restrictions and cheap money.
I know that doesn’t help you cope with today’s financial environment; however, you can’t have believed that interest rates at 1.5% - 2% were sustainable long term, did you? The banks were always waiting to increase the interest rates back up to where they should be at 4-6%. The only problem now is that the increased standard of living, rising inflation, and out-of-control costs on the basics like food and rent has thrown in a curve ball that makes it harder for us to deal with the rising interest rates. So, what are we to do now? We need to do what Canadians have always done in the past: “tuck-in and change our relationship with money.” Consumer spending has already begun to slow down considerably, and this will need to continue over the next two years since long-term inflation expectations appear to be anchored towards three to five years. While we don’t anticipate any more increases to the interest rates, we also don’t see any substantial cuts to them this year either. The house prices will come down, fixed interest rates will stay at the 5-6% and unemployment will go a little higher this year. If we compare today’s environment with trends observed during past recessions we are “spot on,” ( June-1981, March-1990, Oct-2009).
Now is the time to create a spending-budget, track your money, get a “side-hustle-job” if you can, and pay down debt. Don’t worry too much if you can’t get into the housing market as a first-time home buyer. If you can, wait till the house prices drop again and mortgage rates level off in Spring 2025. If you have to renew a mortgage, do so into a short term fixed with a three-tofive-year term, (do not go longer than five years). We anticipate a change in the interest rates based on the USA election this fall, so if you can wait until then to renew or refinance a mortgage this year, you may getter a better rate offer. Again, there will be another swing in the interest rates after our Canadian election in the Fall of 2025.
Christine Ibbotson is a radio host and author of the Canadian best-selling book “How to Retire Debt Free & Wealthy” Send your questions through her website at askthemoneylady.ca