Potential increased costs to borrowing, first in five years
For the first time in five years, the Benchmark interest rate is looking to increase, leading to higher costs of borrowing. Having sat, for the most part, at zero for the last six years, this increase, expected in the spring if 2015, will see rates increase by a quarter of a per cent.
Though this may not seem like a large increase, without a shock to the United States economy, it is projected that the rate will gradually increase throughout the year, finishing around 1.25 and 1.50 per cent total growth. However, unlike many other areas, consumer loans, lines of credit, variable rate mortgages, and some car loans will likely feel the effects of the increase immediately and in complete form, meaning up to a 1.50 per cent increase in interest and noticeable changes in payments.
Thankfully, for those that are currently feeling the panic of money demands, this increase is still not certain, though some would like to see it come to fruition, as it could mean the cooling off of an overheated housing market and the soft landing that has been long predicted by economists and the Bank of Canada.
If this rise in interest rates is cause for concern, don’t panic, as there are simple and straightforward ways in which to combat the rising costs of borrowing. Firstly, paying down debts should be a main focus for 2015. Though some may be inclined to make large purchases before the rates increase, experts are advising against this.
“I find that there’s a feeling that because interest rates are low, you shouldn’t pay down the debt — what’s the point, what’s the rush?” says Jason Heath, a Toronto-based financial planner. “But now may be an opportunity to focus more aggressively on debt repayment while interest rates are low.”
“If you make a lump sum payment against a mortgage or a line of credit, that’s going directly to your principal and reducing the interest you’re going to pay in the future when rates do rise,” Heath continued.
For those who have a floating-rate mortgage or floating-rate loan, Ian Lee, an Assistant Professor at Carleton University’s Sprott School of Business, advises that this loan be locked in with a fixed interest rate – the only downside, Lee notes, being that the principal and interest must be paid back over a specified time, unlike, for example, a home equity line of credit.
“The question [is] how you will save more money, and the answer is: lock in your debts,” Lee said. “If you have a variable rate mortgage, switch to a closed rate mortgage and lock it in for as long a term as possible, because once those rates start going up, we’re never going to see them again.”
Finally, of course, the housing question is still an issue. Should consumers be buying or selling property? At this point, many, including Heath, advise against buying a house, especially on a large new line of debt. With the predicted balancing of the housing market, these newly bought homes could dramatically reduce in value, leading to a loss without any gain.
Alternatively, those who are looking long-term and are worried about the increase in interest rates and payments may consider now a good time to sell – especially if the home was purchased in the last few years – and look to downsize while the market is still lopsided.