An epic moment in interest rate history was the surge of summer, 1980.
A quick recap of what was happening in the year the Bank of Canada’s benchmark rate jumped to roughly 17 per cent by year-end from 10 per cent in July: The Captain & Tennille had one of the year’s big hits, The Blues Brothers was a top-grossing movie and Canadian diplomats helped six U.S. embassy staff escape from Iran. If these cultural and historical references don’t sound familiar, then you could probably use some guidance on how to navigate a world of fast-rising rates.
On the occasion of the Bank of Canada raising its overnight rate for a fifth time in 2022, here are some do’s and don’ts for surviving and profiting in today’s rising rate world.
Do: Understand the pain horizon
Economists say it takes 18 to 24 months for the full effect of rising rates to be felt. The Bank of Canada began raising rates in March, which means we’re just starting to see the impact of higher borrowing costs on households. Rates will plateau at elevated levels until inflation fades and the economy slows. It could be 2024 until rates decline enough to ease the load on borrowers. What’s your strategy for bridging that span of time? Some quick thoughts: Crack open your tax-free savings account if you need money, divert contributions from TFSAs and registered retirement savings plans to debt reduction. Also, variable-rate mortgages look better than fixed-rate mortgages right now because they let you ride rates lower in the future.
Don’t: Let things slide
If you’re struggling to keep up with your debts in these early innings, consider visiting a non-profit credit counselling service to discuss your options. For some help in shoring up your finances for now and the future, try a financial planner who charges an hourly or flat rate. Don’t be afraid to explain what services you want from a planner and then ask the cost.
Do: Stop thinking about ‘good’ and ‘bad’ debt
Home buyers, no more making excuses for high mortgage payments because you’re building home equity. Rising equity doesn’t pay for groceries or gas up your vehicle. Anyway, house prices are falling right now because borrowing costs are rising. The new rule of borrowing: When interest rates are streaking higher, all debt is a problem.
Don’t: Sweat your falling net worth
Concerns about rising debt levels in recent years were sometimes brushed aside on the basis that household net worth was rising. Net worth is what’s left after you subtract the amount you owe from the value of what you own. By now, it should be obvious that net worth is a volatile number that depends to a large extent on factors you can’t control, like house and stock prices. Remember that investing builds your net worth, but so does reducing debt.
Do: Get your money out of big bank savings accounts
Big banks are offering 0.8 per cent to 1 per cent as a regular rate on savings, which is a big improvement on where we were a year ago. But there are at least 15 alternative banks and credit unions offering between 2 per cent and 3.15 per cent. All are covered either by Canada Deposit Insurance Corp. or the deposit insurance plans of provincial credit unions.
Don’t: Get sucked in by rate bonuses
Big banks offer rate bonuses because they’re a cost-effective way to attract new money and keep existing customers. Temporary rate bonuses are much cheaper than offering a consistently competitive rate. The bet is that you’ll get your bonus and sit tight when the rate falls back to the normal level.
Do: Consider one-year GICs for your longer-term savings
One-year guaranteed investment certificates offer rates as high as 4.6 per cent these days and 4 per cent to 4.4 per cent is available as a special rate from some big banks over 12 or 14 months. Money available for emergencies should be kept in savings accounts, but money put away for longer-term goals like a house down payment, a big vacation or tuition costs for university or college will earn a better return in a GIC.
Don’t: Miss out on 5 per cent returns on five-year GICs
At least eight alternative banks and credit unions still offered 5-per-cent returns on five-year GICs as of midweek. That number of financial institutions is down somewhat from a few weeks ago, but there’s still enough of a selection to make it possible for anyone to lock down this attractive rate. A couple of years from now, it’s very likely that 5-per-cent returns on safe investments will be just a fond memory.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, September 7, 2022