Posted by John Doe
For new homeowners, or for those looking to renew a lease, rising interest rates will have an effect on your finances. In the last month, the big Canadian banks have increased interest rates from 4.99% to 5.14%. Interest rates have been relatively low over the last decade, but recently we’ve seen a hike in interest rates that could impact your finances. More increases are expected as the year goes on, so it’s best to prepare now and understand what these interest rate hikes could mean for your personal finances.
A long time consideration when it comes to interest rates is choosing a variable or a fixed-rate mortgage. A fixed-rate mortgage is, as the name suggests, based on a fixed payment each month. This means that whether interest rates fluctuate or not, the payment you make towards your principal is always the same. Mortgage professionals usually recommend fixed-rate mortgages to first-time home buyers as they allow for easier financial planning. Additionally, a fixed-rate mortgage means that even if there is a sudden hike in interest rates, your payment will not change, as it is “locked in”.
Variable rate mortgages mean that your payments adjust each month according to fluctuating interest rates. Your actual payment–the money that comes from your account–remains the same, but the percentage that goes towards interest and your principal fluctuates. Variable rate mortgages allow the homeowner to take advantage of dips in interest rates, and also allow for more flexibility when it comes to refinancing. Variable rate mortgages often do end up saving homeowners money, however as interest rates rise, mortgages professionals only recommend them for the experienced home buyer, who has wiggle room in their finances.
Whether you’re applying for a fixed rate or variable rate mortgage, the spike in interest rates from banks can mean that it could take you longer to pay off your home loan. Higher rates simply mean that borrowing money becomes more expensive. This will apply not only to your mortgage rates but to any money borrowed, including personal loans and credit card debt. Borrowers may feel the strain of these additional costs and it can affect their disposable income. It is always a good idea to reassess your finances and make an annual budget, and it’s more important than ever to factor interest rate hikes into that budget.
While rising interest rates may seem like a negative thing, they aren’t completely bad. Rising interest rates usually reflect a growing economy, and if you have a savings account or a pension, you will also see a greater return on your money.
So what financial steps should you take in the case of interest rate hikes?
- Pay variable rate debt first: if interest rates hike, you should prioritize paying your variable rate debt off first and as quickly as you can. This way you can avoid the impact of rising interest rates!
- Switch to fixed rate: if you are taking out another loan or refinancing, and are concerned about interest rate hikes, you may consider taking out a fixed rate loan. This isn’t just applicable to your mortgage, but to any other lines of credit, or credit cards. Before switching to fixed rate, you should consult a mortgage professional to make sure you will actually be saving money by doing so. If you are changing an existing loan, the lender may charge you a conversion rate, which you should factor into your calculations to make sure it’s actually worthwhile to switch.
- Add to your Savings account: if you have an RRSP, GIC, or other savings account, this is a good time to add to it. Rising interest rates will help you get more for the money you put into these accounts. So while interest rate hikes may have a negative effect on your income, they can actually be a good thing in the long run as they will lead to increased savings and pensions.
- Watch the news: keeping on top of any news relating to interest rates, and the economy in general, can help you stay on top of the current market, and forecast changes in interest rates.
If you are concerned about interest rate hikes, it’s a good time to speak to a mortgage professional. They can explain what interest rate hikes are caused by, how they might affect your finances, and give you tips for protecting yourself against any financial stress caused by rising interest rates.