Interest rates have been near historic lows for several years now, as the government has tried to stimulate the economy in the wake of the pandemic. Now that that appears to have worked, though, the Bank of Canada has signaled that it’s going to be raising interest rates several times throughout this year. Here’s what that means for you and your money.
Some kinds of debt are about to get more expensive.
If you’re holding a variable rate mortgage, be prepared for a larger chunk of your monthly payment to go toward interest each month. As interest rates increase, the interest rate on your variable rate mortgage increases with it, meaning that you pay more interest each month. Rather than increase your monthly payment, often (but not always) your lender will maintain the payment and just adjust how much of it goes toward interest.
Fixed rate mortgages aren’t immune, either. If your term is coming up for renewal soon, you might be surprised to find that your monthly payments are going to need to be higher than before, if you want to stick to your amortization schedule. A single percentage point increase in the interest rate can add hundreds of dollars in interest to each monthly payment.
If you have a line of credit, chances are your interest rate is going to increase on that as well. This can mean an increased monthly payment, which can be a real pain. If you can, try and accelerate any efforts you were making toward paying off this kind of debt. If you want more info on which debt you should focus on paying down first, the snowball method I wrote about a while back is a great resource.
Interest-paying investments are about to get more lucrative.
It’s not all doom and gloom, though; interest-paying investment like bonds, GICs and money market funds will pay a little bit more as interest rates rise.
Don’t get me wrong: I still think these are garbage investments for long-term investing purposes, but they have their uses in the short term – say, if you’re saving up for a vacation, or home renovation or something.
Home prices are (hopefully) about to cool off a bit.
As the central bank interest rates rise, the rate on fixed-rate mortgages tends to rise with it. This means that it’s going to get more expensive to have a mortgage on a home, which means that fewer people will be trying to buy for investment purposes… which should have the effect of slowing down the insane 30% year-over-year prices increases we’ve been seeing on homes lately.
It’s about time…
Rising interest rates can affect the stock market.
Businesses borrow money just like people do, and when the cost of borrowing goes up, they earn less money. For that reason, many people tend to sell off some of their stocks as interest rates rise, which lowers stock prices. This effect is often temporary though, so don’t get panicking and selling off everything you own; you’ll often do better by just leaving your money in, and continuing to buy more as prices get cheaper.
Wrapping it Up
Rising interest rates aren’t the end of the world. While they may make paying off debt tougher – which definitely sucks – this is also exactly what needs to be done in order to curb the insane inflation rates we’ve been seeing lately. We’ve already begun sacrificing limbs and children in order to afford gas, so any help that we can get here is a big deal.
If you have debt, just keep focusing on paying it down – the less you have, the less you’ll be impacted when the Bank of Canada makes moves like these!
