What Changes In Interest Rates Could Mean For Canadians

I've been doing insolvency work for a very long time, so I remember when interest rates were much higher than they were today. In fact, I recall back in the 1980s when mortgage interest rates were over 20% in some cases (no, that is not a typo). 

Interest rates are at historical low levels and are unlikely to remain at this level for much longer although no one really knows when they will return to historical levels.

Why do interest rates change? There are a number of complex factors contributing to changes in interest rates: the strength of an economy which affects supply and demand for funds; fiscal policy; monetary policy; and the level and expectations for inflation. It is important for investors to understand the prospects for interest rates as they value their investments.

What does this mean for the average Canadian?
Let’s assume you have a $500,000 mortgage at 3%, which seems to be good average of the interest rates currently available. Using normal terms and monthly payments you would be paying $2,366 a month. If interest rates were to return to 5%, which is more typical of historical mortgage rates your monthly payment would jump to $2,908. This is an increase of $542 a month for the entire rest of the term of the mortgage. A 2% increase in interest rates produces a 23% increase in your mortgage payment. Such a significant jump in your monthly expenditures could be difficult to manage at the very best of times. It’s also worth noting that many Canadians  there are carrying even higher mortgages than that, particularly in Toronto, Vancouver, Calgary And surprisingly, even here in Regina.

Increases in payments would be less for cars, boats and other consumer goods because the loan periods are much shorter. That being said, there are also people paying interest only on lines of credit who would find their costs increasing sharply as well.

What are the lessons we can take from this?

• Be conservative in the amount of debt you take on.
• When you do take on additional debt, make sure there is room in your budget to account for unexpected increases in interest costs.
•  Pay off any of your outstanding debt as soon as possible.
•  If you are at all able to lock in your payments at a level you are sure you can afford.
• With considerable risk at the moment in terms of floating rate mortgages, you might want to consider moving to a fixed rate mortgage and locking in your payments.

When it comes to interest rates, it would certainly be nice to be able to see into the future. In the meantime however, Canadians are left to manage and negotiate their debt as conservatively and responsibly as possible while we wait to see what tomorrow brings.