Mortgage rates will never return to as low as they were pre-pandemic: Mortgage expert
Jane Kwan started looking more closely at her budget after a mortgage renewal last November raised the interest rate on her loan and saw her payments increase by nearly $400 a month.
The Vaughan, Ont., mom of two has since cut back on dining out and started scouring coupon apps to snag the best deals on food. She limits shopping to her strict grocery list and other necessities like clothes for her growing kids.
“I don't buy things that are not really a need for me,” Kwan told BNNBloomberg.ca in a telephone interview this month.
Like other Canadians, Kwan’s family finances have been squeezed by the Bank of Canada’s aggressive central interest rate hiking cycle, aimed at bringing down skyrocketing inflation that’s put widespread pressure on people's wallets.
The central bank indicated this month that it plans to hold its key overnight lending rate at 4.5 per cent, up from a low of 0.25 last March. It’s expected that the cumulative effects of the increases will work their way deeper through the economy – and regular Canadians’ finances through their mortgages and other loan payments – this year.
Kwan said she sees the anxiety the high-rate environment has caused firsthand from clients at the accounting business she owns and in her own life as she pivots to manage more expensive home payments.
“Everybody seems to be struggling and a bit worried, including myself,” she said. While she feels more secure in her finances than many, she’s been making conscious changes to adapt to the higher costs of living.
“I have changed my habits a bit to manage my money better based on what's going on right now.”
BUDGETING AMID UNCERTAINTY
Stephanie Douglas, partner and portfolio manager at Harris Douglas Asset Management in Toronto, said higher interest rates coupled with rising costs from inflation have stretched people’s budgets.
While inflation affects everyone as it drives up prices for good and services, people with mortgages or large amounts of debt have been most affected by higher interest rates, said Douglas, who is also a certified financial planner.
“I'm doing a lot of financial planning for clients now just around cash flow and what areas could be cut in their budget to fund higher mortgage payments or higher debt payments,” she said in a telephone interview.
People are cutting back on expenses in different ways, Douglas explained. Some are delaying big purchases like cars or putting off home renovations, while others are trying to renegotiate their phone plans or cancelling streaming services.
Survey data has indicated that a majority of Canadians expect to feel the pinch from the current high rate environment in 2023.
And there is uncertainty about the path ahead. The Bank of Canada said it might hold rates at 4.5 per cent for several months to watch how the effects of its monetary policy play out, but the immediate future for interest rates in Canada is unclear. That’s adding to the challenges people face as they try to factor the changes into their budgets, Douglas said.
“We don't know how much higher interest rates are going to go and that's put a lot of pressure on people, the uncertainty of it all,” Douglas said.
“It's hard to plan for something that you don't know.”
HOW TO MANAGE MONEY
Douglas advised that heavily indebted households who are most affected by high interest rates should prioritize paying down or consolidating debts to help get their payments lower. Unnecessary debt should be avoided at the moment, she added.
She also suggested people look at adding other sources of income and ensure they have an emergency fund set aside of about three to six months’ worth of expenses to prepare for unexpected costs or job losses.
“I always suggest having an emergency fund and that's helpful all the time, but particularly in this kind of environment,” she said.
Kwan said she is on decent financial footing, with savings and a steady job to help her weather any money setbacks, but she is closely watching the Bank of Canada’s next moves on interest rates. She renewed her mortgage for one year last November in the hopes that rates would be lower in 12 months, and she’s waiting to see what happens next.
“It worries me that interest rates could be up again ... and then when I renew my mortgage again, I'll be paying an even higher rate. But right now I have savings and I'm working,” she said.
“I'm hoping that rates will go down, but you don't know.”