- Hayden James
What rising rates mean for your finances and home ownership
When choosing a lender for your next mortgage or refinancing, you always want to get the biggest bang for your buck. As the Bank of Canada raises interest rates to help tame inflation, homeowners may be wondering how to avoid losing money and smartly hedge against inflation. What about those who already are carrying high-interest debt and are concerned about having enough cash flow to weather the storm?
Let’s look at the realities of the upcoming rate hike(s), what is expected, and how homeowners can take advantage of this time by acting quickly.
What rate hikes mean if you have a mortgage
Canadians are already sitting on the other side of rate hikes since the Royal Bank of Canada, and Toronto-Dominion Bank reacted to the changing economic environment, increasing prime rates by 50 basis points to 3.20 per cent, with other banks quickly following. This hike was the first time in 22 years that the Bank of Canada lifted the interest rate by 0.5 per cent.
With another hike imminent, there is no doubt that these rate hikes will cumulatively impact the economy and, most importantly, household budgets. In an Ipsos survey, 31 per cent of respondents said they “don’t earn enough to pay their bills and debt payments.”
In the past, as borrowing costs began to rise, consumers tended to spend less, ultimately resulting in the cooling down of the market. This can be a bit of a pressure release on prices across the country — as may be the hope of the BoC for this next round of hikes.
Whenever rates rise, long-term fixed mortgage rates also increase. This is due to them being influenced by both the economy and inflation. And, if the Bank of Canada continues to raise interest rates by up to 150 more basis points over the course of the year, it could mean prime rates of 4.7 per cent. This number is likely to keep growing, potentially making fixed-rate mortgages not the best choice for homeowners. So, what does lending in a world of 5 per cent-plus mortgage rates look like?
When choosing a lender for your next mortgage or refinancing, regardless of the state of the market, you always want to get the biggest bang for your buck. This is where a variable rate loan can be beneficial. Borrowers who have taken on variable-rate mortgages or home equity lines of credit, which are generally connected to the prime rate, will also be affected, but not as significantly.
The upside of variable rates during a rate hike
If you have a large amount of high-interest or revolving debt, you should find relief by transferring your debt to another financial product like a HELOC or Cash Out. This can help you pay down the balance now, rather than carrying it on credit cards that will slowly mount interest costs, paying out more in the long run.
If you choose this route, consolidating your high-interest credit cards and other debts before more rate hikes, you will be well-poised to clear off your existing debts in no time. Thankfully, there has been an increased amount of innovation in the mortgage space, which lends itself to more innovative ways to consolidate debt. Homeowners who are feeling the pinch can turn to new, fairer financial products that can help manage finances before many more interest rate increases.
Debt consolidation does not have to be the only reason you choose to tap into the vast amount of wealth locked in your home. Many homeowners are still seeking ways to upgrade or renovate their home, steady their income or pay for significant expenses in the short term, despite looming rate hikes.
These borrowers have successfully tapped into their home equity by choosing a variable rate product to take cash out of their homes. Locking in a minimum and maximum rate with the right lender today can ensure you can still take advantage of any home value appreciation while gaining access to much-needed cash. It’s a safe way to ensure you have financial stability, no matter the changes in the economy.
By choosing a variable rate mortgage, homeowners can access their home equity, take advantage of lower or optional monthly payments, and potentially qualify for a higher loan.
Making the right choice for your future self
Typically, a rate hike of this size will rarely hurt a borrowers’ financial situation in unmanageable ways. However, no matter the size, any rate hikes can be challenging when managing high-interest debt.
Now is the time to lock in an excellent variable rate while rates are still low. By tapping into your home equity now, you can hedge against incoming rate hikes now and in the future.
Hayden James Toronto Star April 23, 2022