Interest rates are near their lowest in some time, but that all changed on March 2 when the Bank of Canada (BoC) raised its benchmark interest rate to 0.5%.
While the Bank of Canada was signaling hikes quite clearly, its March 2 statement acknowledged that inflation was warming up even faster than expected, indicating that it may be more aggressive with further hikes in the near future.
While the move from 0.25% to 0.5% is not a significant increase in itself, the move is expected to be the first in a series of rate hikes this year, an attempt to tame inflation that has reached its highest level in decades. This means it’s time to review your financial plan.
Many people assume that financial planning is primarily about managing investments. But true holistic planning is much more than that. A real financial plan will look at tax strategies, retirement planning, estate planning, cash flow management, debt management and more.
Rising interest rates can have an impact on many aspects of your financial plan, but for many Canadians the main concern is certainly their mortgage.
To understand how these rate increases directly affect a mortgage, it helps to look at the numbers.
A rough estimate for illustrative purposes is that the increase in your mortgage payment per $100,000 of mortgage owed would be $12.50 per 0.25% increase in prime rate over an amortization period of 25 years.
Using the above estimates on a $700,000 mortgage means that this first increase would increase interest costs by $87.50 per month.
So if you have an adjustable rate mortgage (or when you go to renew your fixed rate mortgage), these additional costs need to be taken into account. While an extra $87.50/month may not seem excessive, it can become quite substantial if we see the other 4-5 expected increases over the next 12-18 months.
With one rate hike already done and more in the works, now is a great time to review your plan and figure out what steps you need to take to prepare your mortgage (and other debts) for this rising rate environment.
Although by no means exhaustive, some strategies you might consider are:
• Restructuring of your existing mortgage loan to protect you from future rate increases
• Locking in your existing variable rate mortgage to stabilize future payments.
• Improve your cash flow by consolidating higher interest rate loans or debt and using that extra cash to increase debt repayments.
• Use home equity to help achieve other financial goals.
• Temporarily suspend contributions to retirement savings accounts to pay off high-interest debt.
As always, the right plan and strategies for you will be unique to your personal situation. So, with the scheduled rate increases underway, take the time to review with your financial planning professional.