Will Rising Interest Rates Affect Me?
The Bank of Canada has raised interest rates five times since July 2017 after going nearly a decade without an increase. This trend is expected to continue, with some industry experts predicting a three percent overnight rate by 2020. Many Canadians are now wondering how rising interest rates will affect them personally — and whether the impacts will be positive or negative.
How will rising rates affect you?
This depends on several factors including how much you have in savings, what your current debt situation is like and whether your interest rates are fixed, variable or shortly up for renewal. Listed below is a summary of some of the potential positive and negative consequences of rising interest rates, along with steps you can take to maximize your financial position during this upward trend.
Savings Benefits
Those with money stashed away in an interest-bearing account will notice a slight uptick on their savings as interest rates increase. If you haven't yet developed a savings habit, this provides a worthwhile incentive to start building an emergency fund and take advantage of higher returns.
You may also look forward to taking advantage of long-term deposits such as guaranteed investment certificates (GICs) which provide a rate of return based on the Bank of Canada Rate. With that said, if you recently invested in one of these vehicles, note the rate is based on when you locked the funds in — so you may not get the full benefit you would two or three years from now.
Mortgage Concerns
If you currently have a variable rate mortgage, this may be an opportune time to start looking at fixed interest rates. As the overnight rate is still relatively low, start shopping around so you can guarantee yourself the lowest possible rate for the longest possible timeframe.
Unfortunately, this could work against homeowners in the mid- to late-stages of a locked-in term. Expect to take on a higher rate and payments when it comes time to renew. Remember to shop around for a competitive rate and terms.
Invest in Automotive Maintenance
Vehicle loans generally utilize fixed interest rates for the term of your agreement. That's good news if you're currently paying off a vehicle purchase, as your payments and terms will likely not change with rising interest rates.
Unfortunately, financers and dealers know rates are rising and are eager to capitalize. That means buying a new car is already getting more expensive. So, you may want to put that purchase off and look for a good mechanic instead.
Pay Down Your Line of Credit
Because your line of credit agreement is usually prime (the bank's bottom basement rate) plus a certain percentage, it will invariably become more expensive as interest rates go up. If you've been taking advantage of low rates to work on other financial goals, now's the time to shift gears and focus on paying down the principal.
How to Keep More Money in Your Pocket
The following steps can help you avoid the worst pitfalls of a higher-interest rate environment while maximizing the benefits:
- Pay down your unsecured debt while interest rates are still low.
- Consider a fixed low-rate loan to pay off your line of credit and avoid rising interest payments over time.
- If you're not locked in: Shop around for low, long-term fixed mortgage rates.
- If you're locked in: Work with your mortgage broker to investigate the penalties and potential savings for an early renewal.
- Consider your vehicle options. If you need to finance a new car, consider doing it now to avoid higher rates down the road. Don't forget second-hand options or choosing to keep up the maintenance on your current vehicle.
- Keep adding to your savings account and take advantage of short-term deposits for now. Wait for interest rates to rise before locking your money into a longer-term option.
Life-Changing Debt Solutions
If you're currently struggling with debt and worry rising interest rates will push you over the edge, you have options for a financial fresh start. During a Free Confidential Consultation, a Licensed Insolvency Trustee will review your entire financial situation and identify opportunities to defeat your debt for good. You may qualify for a Life-Changing Debt Solution such as bankruptcy or a Consumer Proposal — among several other helpful services. Your Licensed Insolvency Trustee will help you choose the one that's right for you. That way you can get rid of the debt stress and look forward to the savings opportunities on the horizon.
