What Do Higher Interest Rates Mean for You?
When the Bank of Canada raises its benchmark rates, it could affect your finances in more ways than you think.
In 2017, the Bank of Canada raised its benchmark overnight rate not once but twice and is currently at 1% (September 2017). Whether you’re a homeowner, investor, saver, or borrower, higher interest rates have implications for your financial life.
If you have a mortgage or other debt
How and when interest rate increases will affect you depends on the kind of debt you have. The good news if you have a fixed rate mortgage is you won’t feel the impact until renewal time.
Even then, you might find rates below where they were a few years ago. It could be a different story if you carry other debt.
Have a personal line of credit? Expect your interest rate to move with your lender’s prime rate. And, while the size of your payment won’t necessarily change if you have a variable rate mortgage, anticipate more of the amount going to pay interest, adding to the time it takes to wind down the principal.
A small uptick in rates might not concern you. But will that still be true if more hikes follow? Discuss stress-testing your current or planned debt with your advisor and ensure you’re comfortable with higher interest costs.
Look for opportunities to save interest by paying down what you owe, so you’ll have less debt to cover if rates do rise further. Reducing debt is like earning a risk-free, guaranteed rate of return that’s often superior to holding cash or conservative investments, especially if you’re in a higher tax bracket.
If you own real estate
The consensus view from housing experts is interest rates would have to increase substantially for real estate prices to be impacted in a major way. That’s particularly the case in Vancouver and Toronto, key markets for foreign buyers and speculators less deterred by rising rates.
On the other hand, first-time buyers could suffer a real dent in their purchasing power – or be pushed out of the market altogether – should interest rates continue on an upward path.
If you hold stocks and bonds
For investors, the consequences of rising interest rates can be a mixed bag. An inverse relationship between prices and yields means when rates are expected to rise, bond values generally fall. But, it doesn’t mean the time for owning bonds has passed.
They can still make a lot of sense for your portfolio, both for the predictable income they’re able to generate and their diversification benefits.
For stocks, the impact of rising interest rates is less predictable. Higher rates often go hand in hand with a stronger economy. That’s good for corporate profits and equity values. That said, if rates jump too far, too quickly, it can choke off growth prematurely and shift the stock market into reverse.
Equities which rely on their dividends to attract investors – think stocks from higher-yield sectors such as telecom, utilities and pipelines – will likely struggle the most since their payouts lose some of their edge as interest rates rise.
If you own foreign stocks, keep in mind a stronger loonie can lower your returns when measured in Canadian dollars.
If you hold cash
Interest rate increases are a positive for cash and cash-equivalents like savings accounts and GICs. One way to capture rising rates is by constructing a GIC ladder, say for three or five years.
By staggering your maturities at one-year intervals you’ll be able to reinvest maturing funds for better returns should rates go up. But if they do the opposite, the bulk of your money remains invested at higher yields.
Another option? Choose a flexible deposit like BlueShore’s Jump Rate term deposit which lets you reinvest your funds before maturity.
It’s time for a fresh look
How prepared are you for higher interest rates? Now’s the time to take a fresh look at your finances to ensure you’re properly positioned for the opportunities and risks ahead. Contact a BlueShore Financial advisor for a complimentary review.