Are you Interest(ed)?
Are you Interest(ed)?
I’m 53. My wife and I bought our first house in 1988. The interest rate on the first mortgage was 8% and we had a second mortgage at 12%. I do chuckle at current interest rates and particularly with all the reaction to a one-quarter percentage point increase in the Bank of Canada Rate. But, I have experienced higher (or closer to normal) interest rates and many people have only experienced the crazy low-interest rates that we have had for the last 7 years. I count myself lucky; my parents had an 18% mortgage rate locked-in for 5 years starting in 1982.
On July 12, 2017, the Bank of Canada raised their rate from 0.50% to 0.75%. The chartered banks then increased their Prime rate from 2.7% to 2.95%. Consumers will now experience an increase in their debt costs. For example: National Student Loans are a floating rate of Prime + 2.5% fixed rate. Those who live paycheque to paycheque will be affected first.
With mortgages, those with a fixed rate will see no immediate change in monthly payments or how much is allocated to interest and principal; the impact will occur at renewal time. However, those with variable rate mortgages will feel this increase immediately – while the monthly payment might not change, the amount going to interest will go up and the amount going to reduce your principal payment will be less.
I don’t have a crystal ball and no one does. However, the consensus seems to be that we are heading into a higher interest rate environment and interest rates will continue to rise. This means that, for those carrying significant debt, the amount of your disposable income going to nonproductive interest expense will increase leaving less money for the necessaries of life or discretionary expenditures. Now is the time to consider this. Think about the debts you are carrying and the cost of that debt. Think about how much a 1% interest rate increase will affect your debt costs and whether you can sustain that increase. Think about whether the savings by having a variable rate mortgage, as compared to a fixed rate, is worth the risk. If you own a house now, start to think about how you are going to afford a higher mortgage payment in the future. If you are just looking to buy a house, make sure you leave some room for higher payments.
On the positive side of the equation, the savers among us have been craving higher interest rates to provide more income and lower risk investment growth.
It seems that, although interest rates will be increasing, they will rise slowly as opposed to a significant spike. This will give people time to consider the effects but they do need to be considered. Getting “nickeled and dimed to death” can occur with a slow but steady increase in interest rates. Each little increase can seem insignificant but, over time, these increases can turn out to be quite significant. If your debt payments are going to be higher in the future, now is the time to start making adjustments or looking at your options.
Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt solutions, consumer proposal and personal bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth – it’s your choice.