Could interest rates finally be heading higher in 2015? That’s the question on everybody’s mind. CBC has an interesting article, Interest rate hike: 4 ways Canadians should prepare. The overnight lending rate has been frozen for over 4 years at 1%, the longest stretch in Canadian history, but that could soon change. The U.S. Federal Reserve is expected to hike interest rates as early as the summer of 2015, with the Bank of Canada likely to follow. Here are some ways to prepare for the possible new reality of higher interest rates.
1. Pay Off Your Debt
It can be tempting to take advantage of lower rates while they’re still around. Instead of taking on new debt, you should consider paying off the debt you already have. Consumer debt like lines of credit and variable-rate mortgages are tied to the prime rate. If the prime rate goes up, more of your money will go towards interest and less towards the principal. If you can make a hefty lump sum payment on your mortgage before rates go up, it can save you thousands in interest and shave years off the life of your mortgage.
2. Consider Locking-in
If you have a line of credit or mortgage tied to the prime rate, you should consider locking-in while rates are still low. With the price of oil tumbling, the Bank of Canada 5-year bond yields have never been lower. It might make sense to lock-in to the safety of a fixed-rate mortgage before the prime rate starts to creep up.
3. Don’t Rush into the Housing Market
While a lot of homebuyers may want to rush into the housing market before the arrival of higher interest rates that might not be such a wise decision. Higher mortgage rates could lead to the housing bubble finally bursting. Homebuyers who have been sitting in the sidelines will kick themselves if they just buy before home prices start to fall. Don’t think a housing bubble can happen in Canada? The Bank of Canada joined the chorus of those worried about our housing market, saying it could be as much as 30% overvalued.
It’s important to “stress test” your finances and make sure you can handle higher interest rates. If your finances couldn’t even handle a 25 basis point rise in prime rate, perhaps you should consider buying a less expensive house or a condo instead.
4. Consider Selling Your Home
If you find yourself “house rich, cash poor,” you may find yourself in a tough situation when interest rates rise. Even if you have a fixed-rate mortgage, you’ll face the new reality of higher interest rates when your mortgage renews. If you can’t afford higher mortgage payments, you’ll have to make a difficult decision. Should you sell the family home? If you’re stressed about your finances, now might be the time to sell at the peak of the market before real estate values fall.
