Last July, the Bank of Canada (BoC) raised its key interest rate by 25 basis points, from 0.50 percent to 0.75 percent. The upward move, the first in seven years, was quickly followed by Canada’s largest banks raising their prime interest rates.
While an uptick in the overnight lending rate is a sign of the government’s confidence in the growth of the Canadian economy, it has specific financial implications for Canadian consumers. Homeowners and prospective homebuyers, in particular, will now have to contend with a greater cost of borrowing and homeownership, which could potentially alter their financial planning.
With the prospect of further rate increases prospective homeowners shouldn’t do their mortgage calculations on 2.5-percent five-year fixed rates anymore, but on a more realistic 5-percent to 6-percent five-year fixed, he says.
Financial plans may also need to change. As interest rates go up and you need to renew your mortgage, you should consider the impact on your weekly and monthly cash flow. For instance, if you have a $400,000 mortgage at a 2.5-percent interest rate you may be paying about $448 a week, but a 1-percent hike will increase your weekly payout by about $50. If interest rates go up by 2 to 4 percent, you could be faced with an additional $100 per week on your mortgage payment.
The BoC’s decision to hike rates also serves as a reminder that you need to periodically stress-test your mortgage at a higher rate. A small increase isn’t going to be detrimental to a lot of people initially, but over time if those rates do increase, you’re going to feel it
Therefore, now may be a good time to switch to a fixed-rate mortgage, before the rate rises again.
There are also implications for investment portfolios, particularly fixed-income securities. Typically, when rates rise, bond prices drop in value. Those who have a high concentration in bonds could see their investments take a hit. That’s why you should have a diversified portfolio and consider investment vehicles that hedge against the negative impact of rising interest rates.
However, there are benefits to rising rates, including potentially earning more interest in a savings account. Mounting rates tend to strengthen the Canadian dollar, too. Rising rates can help if you’re looking to buy some U.S. dollars for investing in U.S. real estate, or buying American securities.
Rising interest rates mean you may need to reconsider your mortgage costs, rebalance your portfolio and/or update your financial plan. Ask your professional advisor what’s best for you.
This column, written and published by Investors Group Financial Services Inc. and Investors Group Securities Inc. presents general information only and is not a solicitation to buy or sell any investments. Contact your own adviser for specific advice about your circumstances.