Back in January 2015, the Bank of Canada made the surprising move of lowering the key interest rate from 1 per cent to .75 per cent, shocking those who thought a rise was inevitable. But surprise factors like an oil price plunge forced the Bank’s hand, as they made the first adjustment to the key rate since September 2010.
The business section of your newspaper has been filled with stories about it ever since, still peppering in reminders of the “inevitability” of a rate increase, and filling us up to the brim with graphs and pie charts about the economy at large.
But what has it done to your life? Are fractions of percentage points actually meaningful? Are there ways to take advantage of low rates? Are there dangers or risks? Let’s take a look at some of your options:
Mortgages are the single biggest piece of debt that most of us will ever have, so if you want to take advantage of low interest rates, this is probably the place to start. If you’re in the market to buy, this is a great time. A recent Bank of Montreal home buyers survey found that more than a fifth of millennials have shortened their time-frame for home buying, thanks to the low rates.
People shopping for mortgages might want to consider taking the fixed-rate option. Historically, variable rates have been better for homeowners, but some financial experts think now is a time to lock into a fixed-rate. Ted Rechtshaffen, president at TriDelta Financial, argues that a lot can change over a 5-year period, and the risk of variable rates are not worth the reward of the small premium you get when choosing them.
Current home owners can also take advantage by making their mortgage payments as if there was no drop at all. The Canadian Association of Accredited Mortgage Professionals said over a third of Canadians were able to bump up their payments in 2014, with some renewing their loan at a lower interest rate. More money going toward the principal instead of interest means faster repayment and a lot of savings.
If your mortgage payments aren’t as high as they used to be, there are other ways to spend the difference. The key interest rate may be low but your credit card APR is still astronomically high. If you are only making minimum payments on your credit card, you are not making very efficient use of your money. If your mortgage payment has dropped by $150 a month, putting some or all of that toward your credit card will dramatically reduce your debt and save time and money.
Consolidated Credit’s credit card debt calculator illustrates this idea. If you’re making the minimum payments on a balance of $3,720 (the average Canadian credit card debt), at 19 per cent APR with a minimum monthly payment calculated at 2 per cent of the balance, it would take nearly 50 years and cost you $13,000 in interest.
Add your monthly mortgage savings of $150 to your minimum payments and your debt will melt away. You’ll repay the balance in two years instead of fifty, and you’ll save over $11,000 in interest payments. It’s a no-brainer.
Before we get carried away, let’s not forget about the “inevitability” of interest rates rising. If you’re taking advantage of lower rates, make sure your budget can handle the eventual bump in rates. Try stress-testing your finances by pretending the rates have increased, and see whether or not you can still meet your financial obligations. Chances are, any actual increases will be gradual and will allow you the chance to make your own budgetary adjustments. But it is still a wise move to tread carefully and try not to over-extend yourself. Make hay while the sun shines, but keep an umbrella handy.