How to prepare for higher interest rates
Forgive me if you’ve heard me say this before: I believe the next move in interest rates by the Bank of Canada will be higher.
Okay, I’m not exactly going out on a limb since the central bank’s governor, Tiff Macklem, more or less telegraphed his intentions this week. This is something we need to pay attention to.
As a planner, I want to be prepared since the window of opportunity appears to be closing. And you should, too.
Here are five things to focus on before rates head higher:
1. Loans and mortgages: No need to panic if you are in a fixed mortgage. I suspect you went fixed in the first place to afford yourself the luxury of time and peace of mind. However, rising rates will make housing more expensive for those in variable rate mortgages or variable rate loans. Now may be the time to consider locking in.
When it comes to loans, don't just focus on mortgages. If you are thinking of buying a new car or renovating your home, consider locking in funding before it becomes more costly.
Justin Thouin is the founder and chief executive officer of LowestRates.ca. He told me via email, "Canadians need to be more careful with their spending in a rising rate environment. You should identify your highest interest debt first and make paying that off a priority before anything else. This could include credit cards and personal loans, for instance.”
2. Savings and investment: We have proven to be a nation of savers during the pandemic and as bank accounts have grown they certainly haven't been helped much in this low interest rate environment. After taxes and inflation you may have even seen a slight erosion. While rates will ultimately tick a little higher, it will take time for that to have a meaningful impact on your returns. Given the strong performance of the markets and high levels of savings, I think now is the time to rebalance your portfolio to ensure your savings and investments are aligned to your risk tolerance, time horizon and asset allocation.
3. Jobs and the economy: The economy and the job market are proving to be more resilient than anyone was originally projecting; however, now is not the time to be complacent. We have still not witnessed meaningful business investment in Canada and my fear is that there could be further job losses down the road. No one really tends to worry about handling their debt obligations until they don't have a job and quickly discover they are in over their head. Now is the time to secure a line of credit or credit card for use in an emergency situation only. Better yet: build up three-to-six months worth of living expenses in an emergency fund. All are best if never used, but invaluable if needed.
4. Travel: The pandemic has crushed the travel industry amid shutdowns and restrictions around the globe. However, headway against the virus will eventually unleash pent-up demand. Keep in mind that higher rates often lead to a higher dollar. So whenever the Bank of Canada nudges up its benchmark rate, you can bet that some Canadians will take advantage of cheaper international travel opportunities.
5. Purchases: Hit the pause button before you make any major purchases that you know you can't afford and will eventually have to finance in a higher-rate environment.
The financial landscape is changing and as our economy strengthens so should our personal balance sheets.