Interest Rate Hike: 4 Ways Canadians Should Prepare

The Bank of Canada is expected at some point in the year to hike interest rates, and even a small and gradual hike would affect millions of Canadians with car loans, mortgages and lines of credit.

“Definitely not going to take much of a hike to make a difference and impact your payments,” says Toronto-based financial planner Jason Heath. “As soon as there’s a quarter-point increase in interest rates, I think it’s going to have an immediate impact on people’s psychology.”

A Canadian increase would likely follow an American rise in the rates and may not come until the third quarter. But by the end of the year, Canadians could be facing a 1.5 per cent benchmark rate (it’s currently at 1.0 per cent) and higher borrowing costs.

1. Pay down debt

Some consumers may be tempted to make large purchases before the rates go up, but analysts advise against that, saying consumers should instead focus on paying down debt first. 

“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? But now may be an opportunity to focus more aggressively on debt repayment while interest rates are low,” Heath says. 

“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.”

Although people may be tempted to pay down mortgage debt first, they should instead focus on department store or credit card debt where interest rates are much higher and unlikely to be affected by the Bank of Canada interest rate hike.

2. Lock in mortgage or line of credit rates

Common advice, says Ian Lee, assistant professor at Carleton University’s Sprott School of Business, is that those who have a floating-rate mortgage or floating-rate loan should lock in with a fixed interest rate. But the downside, he noted, is having a fixed payment, meaning the principal and interest must be paid back over a specified time, unlike, for example, a home equity line of credit.

“But the question was how will you 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.”

3. Don’t rush to buy a home

Higher interest rates could also lead to a correction in the housing market.

“The big issue as far as I can see is that people panic and think they have to get into the housing market before interest rates climb. But they have to recognize the overall long-term impact of interest rates actually climbing,” says Laurie Campbell, CEO of Credit Canada Debt Solutions.

Homebuyers who rush out to purchase homes to beat a spike in rates could end up with homes dropping in value.

“I think people have to be vigilant about any big purchases they may be making in the next little while. Housing in particular,” Heath says. “If someone is considering purchasing a house, they have to really look at more normal interest rates during their budgeting.”

4. Sell the house?

Some Canadians have financially overextended themselves in their homes, leaving them barely any wiggle room in the event of an interest rate increase, says Chad Viminitz, an Edmonton-based financial planner and author of Money Assassins.

“To really put themselves in a good financial position, saving a cup of coffee or doing all those things you hear about, is really not going to help,” said Viminitz.

“Because when you already have everything built into your house and into your vehicle and you get a one per cent change in interest rates? Well, a one per cent change on 50 per cent of your spending — you’re in a really really difficult position.”

And it’s a development that could force homeowners to make some difficult decisions, he says. 

“If someone has the courage and that long-term view, and if they just bought a house in the last couple of years and they are really worried about interest rates going up, it may also be the right time to sell and to downsize to something that is more affordable,” Viminitz suggests. 

“And that’ s difficult. But we do come across a few people who said, ‘I need to make a change, because I can’t afford this, and saving money on coffee is not going to do this.'”

 

Source: CBC News

This Video is Worth $3500

As mortgage brokers, it is our job to provide our clients with the best product to fit their home buying needs. This includes saving them the most money possible. Our broker, Chris Turcotte, explains how making sure you get the best rate possible, can save you substantially in the long run.

Canadians Losing Money on their Mortgages

For most Canadians, when shopping for a mortgage the simple solution is to walk through the doors of your local bank or credit union branch.  It seems to be that old saying “better the devil you know” is true.  We believe that the bank, trust company or credit union that we have been dealing with for years is the best place to be.

In fact in 2012 a whopping 72% of people did just that when they were looking for a mortgage.  The result?

Canadians lost over 41 Million Dollars by simply not shopping around for the best mortgage product for their needs.

As consumers, people typically believe that if they get the lowest rate they will save the most money, and that is largely true, but you will notice that we did not mention rate in the above statement.  Why?  Well contrary to what most people might believe, rate is not the single all important item to consider when looking at getting financing for your home.  Things like term, prepayment options, amortization, and payment schedule (to name just a few things) can have a dramatic impact on the true cost of the mortgage you are obtaining.

Canadians are very web savvy consumers when it come to getting a mortgage, in fact 2 in 3 of us will research our mortgage online before we make a decision.  What is not talked about typically is what we are researching and there are two very key items, rate and mortgage calculators.

Rate is pretty self explanatory – we want to find the lowest possible.  Mortgage calculators help us to figure out what we qualify for, what our payment will be, etc.  What we do not do is research what different product options are available, and how those options can impact us – for good or bad.  If you try to find that information you soon discover that it is not so easy, and when you do find some it is very complicated to understand.  It is because of the complexity of mortgages that the majority of people simply put their faith in the banks and are resigned to the fact that taking 25 years and at the end paying almost twice the value of the home is normal.

Mortgage brokers offer Canadians a solution to the stress of shopping around, and they typically do it at no charge.  Their role is to do the work for you and find the right mortgage to suit your financial and home ownership goals.

At Centum Mortgage Choice we believe that all Canadians should have the opportunity to achieve their financial goals and dreams.  It’s why we do not just offer mortgages, rather we offer Home Ownership Solutions.

If you want to discover how you can stop losing money on your mortgage, contact a Centum Mortgage Choice broker today.


IMG_2894 Chris Turcotte, Owner/Broker

 Office: (204) 727-2177

 Cell: (204) 720-4002

 Email: chris@christurcotte.ca