6 implications to consider
As many of you now know, The Bank of Canada is hiking its key interest rate for the first time in seven years. The bank raised its overnight lending rate to 0.75 per cent from 0.5 per cent Wednesday. Six implications follow from this news.
1. Everyone will have something to complain about
Everyone will have something to complain about as interest rates rise, and there are no real winners. If you borrow, you’ll pay more. If you’re a saver or a conservative investor, life has now improved from negligible to not as bad as it was. Sorry not to be more optimistic, but facts are facts.
2. It’s a borrowers world. Savers just live in it
As Rob Carrick (The Globe and Mail, July 12, 2017) observed: ‘It’s a borrower’s world. Savers just live in it.’ The cost of mortgages will be adjusted when interest rates rise. GICs and savings rates will increase slightly. When GIC rates do move higher, they’ll still lag well behind the inflation rate in many cases.
3. Prepare for mortgage renewal shock
The impact of rising mortgage rates is arguably worse for existing homeowners than it is for first-time buyers. My advice? Resist the easy solution of lengthening your amortization to ease the load of higher rates. Your payments will fall, but you’ll be mortgage-free at a later date than before. This is a poor retirement savings strategy.
4. Be cautious of housing as an investment
The key driver in rising real estate values was low interest rates. There are markets in Canada that are affordable now and will remain so as mortgage rates rise. But a continued increase in rates will take the steam out of housing everywhere.
5. Wage earners get hit
According to Statistics Canada, hourly wages moved up by just 1.3% on a year-over-year basis, the same rate as the most recent inflation rate. The net result is that you’re facing higher household costs through higher interest rates, while your income stagnates on an after-inflation basis. Says Mr. Carrick: ‘Until wages start moving, higher interest rates are like a pay cut or a tax increase.’ My conclusion? Resist the easy way out by lowering the amount you save for retirement or your children’s post-secondary education.
6. Your line of credit could be a problem
According to the Finance Consumers Agency of Canada there are about three million home equity line of credit (HELOC) accounts in Canada, with an average outstanding balance of $70,000. Think about it. As interest rates rise, it costs more to just maintain a HELOC. Pay it down if you can.
Let’s not forget that Canada is riding one of its strongest growth spurts since the 2008-2009 recession, with the expansion accelerating to an above-3% pace over the past four quarters. That’s the fastest among Group of Seven countries and double what the central bank considers Canada’s capacity to grow without fueling inflation. Onwards and upwards!
Dave Ritcey, The Ritcey Team, Scotia Wealth Management