Current economic conditions have interest rates the lowest they have been in years. Central banks lower rates in time of economic downturn to stimulate the economy. This can make borrowing money seem very appealing. It is important to keep in mind when borrowing that interest rates will not stay low forever. Canadians need to prepare for an eventual period of rising rates, as it will impact mortgages, lines of credit, student loans, savings accounts, and investments. A survey conducted by IPSO in 2016 indicated that 48% of Canadians are just $200 away from not being able to meet their financial obligations. With the current low rate environment being as appealing to consumers as it is, it is possible to take on debt that may become a strain once interest rates rise again…whenever that may be.
What You Need to Know
When Will Rates Rise Again?
The truth is no one really knows. The Canadian economy has taken a significant hit during the covid-19 pandemic and there is no clear end in sight. What we do know that is that the economy works in cycles and one day the central bank will raise rates again. It may be a few years before rates rise again.
Is it a Good Time to Borrow Money?
Yes and No. Rates are extremely low right now meaning that mortgages, credit lines, and other forms of consumer debt are offering low interest rates to cushion against the blow from the pandemic. This can be a good thing in the short term as it is possible to take advantage of significant interest savings. However, consumers that are planning on taking on long term debt need to be aware that the interest rates we are experiencing currently won’t be around forever and they will likely have to deal with higher rates again in the future. This means your payments will eventually increase.
What Loans Will Be Affected?
Credit Cards typically have a fixed interest rate and are not affected by rate changes. Mortgages with fixed rates are also unaffected, but only until they renew. Therefore, you may be able to secure a 5-year interest rate but once it comes up for renewal it is very possible the rates could be significantly higher. It is important to ensure that you will be able to make higher payments when the time comes, or you could risk defaulting on your loan.
Any debt with variable interest rates may be affected as well. This could include student loans, credit lines, business loans, and home equity lines of credit.
How Can You Prepare?
It can be a smart idea to do a stress test on your budget to see how you would be able to cope with increased debt payments. For example, if you take out a 25-year mortgage today with a 2.9% interest rate and it is set to renew in five years. After 5 years rates have increased significantly and now the lowest rate you can secure is 5%. Will you be able to afford the extra interest? This is something that should be prepared for well in advance.
The Bottom Line
Always borrow responsibly and be aware that the current interests rate environment won’t be around forever. A good rule of thumb is hope for the best but prepare for the worst. Do your own “stress test” before taking advantage of the currently low interest rates being offered. This way you will know that you can meet your obligations for years to come.