It’s time to prepare for higher interest rates

Opinion



Do you have variable rate debt?

If so, you got a reprieve this week when the Bank of Canada decided to leave its overnight rate at 0.25%, an all-time low that was hit shortly after the start of the pandemic.

However, with the inflation rate for the past 12 months at 4.8% and around 75% of economists calling for a rate hike, expect rates to rise over the next month unless there is there is a significant drop in the next inflation report. .

Anyone with variable rate loans might want to consider their options for securing the interest rate slightly higher for an extended term. This will lock in today’s rates and provide predictability for payments in the future.

The most common variable rate debt is a line of credit, where the interest rate is based on the prime rate or the stated lending rate of a bank or credit union. The interest rate you pay will change as official rates change.

The biggest debt most people carry is a mortgage. Mortgage payments are usually the largest monthly payment for anyone who has had to borrow to buy a home. With a variable rate mortgage, an increase in interest rates can mean an increase in monthly payments and a significant effect on the family budget.

On the other hand, some mortgage agreements maintain a fixed payment when rates rise, but less of the payment is allocated to principal and more to interest. This means that you repay less of the loan during the current term.

The challenge, of course, is deciding how much more you want to pay for certainty. Given that rates are generally expected to rise, interest rates offered on longer-term mortgages have already risen, although variable rates have remained low.

For example, variable mortgage rates are generally between 1.55% and 1.75% this week. Locking for five years will cost you around 2.75%, assuming you have good credit and negotiate a better rate than the one posted.

On a $200,000 mortgage, locking in for five years could increase monthly payments by about $120, but would provide certainty for those five years.

If variable rates rise more than 1% over the next few years, locking in would seem like a wise move.

So how much will rates increase over the next two years? Sorry, I can’t tell you (and, of course, you wouldn’t want me to tell you anyway, because that would make the decision too easy…).

But the Bank of Canada and the US Federal Reserve announced that they would start raising rates in March. In the United States, the markets anticipate four increases in 2022.

These indicators suggest that anyone with an adjustable rate loan should do a bit of deciphering and budgeting. Don’t ignore the problem.

If you’re shopping for a home now, get your mortgage pre-approved (which you’ve probably already done) and make sure the approval includes an interest rate guarantee for at least 90 days. You can decide the duration when your purchase is complete, but at today’s prices.

As with all financial (and life) decisions, there are always unknowns, but careful thought and planning almost always gets you ahead.

Dollars and Sense is intended as an introduction to this subject and should in no way be construed as a substitute for personalized professional advice.

David Christianson, BA, CFP, RFP, TEP, CIM is a Fellow FP Canada™ (FCFP) recipient and has been repeatedly named one of Canada’s Top 50 Financial Advisors. He is a Senior Wealth Advisor and Portfolio Manager at Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of Managing the Bull, A No-Nonsense Guide to Personal Finance.

David Christianson

David Christianson
personal finance columnist

David has been a financial planner and life advisor since 1982, specializing in helping clients identify and achieve their most important goals and then managing all of their financial affairs, including investments.

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