What happens when interest rates rise

The benefits, and downsides, of a higher interest rate in Canada

If you have a mortgage or other loans, rising interest rates are something to keep an eye on.  There may be ways to take advantage of the situation.

Interest rates slowly creeping up

Interest rates in Canada have been low for some time. The Bank of Canada's move to raise its lending rate in the summer of 2018  is significant, but it remains relatively low.¹

For example, in the early 1990s the interest rate was roughly 10 times what it is today, and it was even higher in the 1980s.²

How Canadians are dealing with higher rates

A recent poll by consulting firm MNP shows roughly half of  Canadians say they're feeling the effects of rising interest rates.³ A poll from Nanos Research suggests that Canadians are spending less due to rising rates.⁴ Canada's housing market, which has been very hot for a few years now, may also be cooling off as higher interest rates make mortgage payments go up.⁵

How higher interest rates may affect your loans

Higher interest rates make loans and mortgages more expensive. Homeowners in cities with high-priced real estate, like Vancouver and Toronto, could pay hundreds of dollars more on regular mortgage payments. Higher interest rates also affect lines of credit as well as car and student loans.

If you have a student loan, you can expect the cost of paying off your loan to increase along with the interest rate. Since the year 2000, most lenders have decided their rate for student loans by taking the prime rate and adding 2.5% for variable-rate loans and 5% for fixed-rate loans.⁶

The benefits of higher interest rates

Higher interest rates can be good news. The savings in a "high-interest" bank account could grow faster. Also, many fixed-rate investments, like guaranteed interest options or guaranteed investment certificates (GICs), could give you higher returns. You can also work with an advisor to update your mutual funds and segregated funds policy to help you take advantage of higher interest rates.

There are some simple ways to make the most of rising interest rates, or at least limit their negative impact. For example, if you have an open mortgage, look at changing it to a closed mortgage. Unlike an open mortgage, a closed mortgage won't be affected by interest rate changes.

For the time being, interest rates aren't exactly rising quickly, meaning the total return on your investments will likely remain small. Eventually, however, a rising interest rate could mean more income for your investment portfolio, especially those that are fixed income, like bonds and GICs. (Your fixed-income investments are also  an important balance to any investments in stocks, particularly when the  market takes a downturn).

How you can manage a rising interest rate

You can also have a talk with an advisor about adjusting your savings and investments to make the most of rising interest rates. They may be able to help you find solutions that give a better return as rates move up.

¹ Bank of Canada raises interest rate: Read the official statement - Opens in a new window National Post, July 11, 2018

² Canada Interest Rate, 1990-2018 - Opens in a new window Trading Economics; Richard Blackwell, Remember when: What have we learned from the 1980s and that 21% interest rate? - Opens in a new window The Globe and Mail, updated June 5, 2017.

³ Grant Bazian, Indebted Canadians say they would need to make almost 40 per cent more to live without consumer debt - Opens in a new window MNP, May 24, 2018.

⁴ Canadians are seven times more likely to say higher interest rates have negative rather than a positive impact on their personal spending - Opens in a new window submitted by Nanos to Bloomberg News, August 2018

⁵ What the Bank of Canada rate hike means for your mortgage and savings account - Opens in a new window Financial Post, July 12, 2018.

⁶ Canadian students owe $28B in government loans, some want feds to stop charging interest - Opens in a new window Global News, updated May 31, 2018.

Contact me

Todd Zeng

E. todd@ztfamilyfinancial.com

T. 778-866-0989

(Content Courtesy of Canada Life)