How we’re going to deal with higher interest rates
I’ve mentioned this on my site before – no doubt interest rates play an important role in the economy. Interest rates affect all of us but not necessarily in a good way.
Here are some general pros and cons of our (prolonged) low interest rate environment.
Pros of low rates:
- Great borrowing costs to finance homes and cars.
- Great borrowing costs for businesses and other investments.
In general, credit is cheap. Low interest rates promote consumption. It makes spending look like the right thing to do.
Cons of low rates:
- They hurt folks with fixed income assets like bonds and saving accounts.
- They do not reward fiscal responsibility, by businesses or individuals.
In general, money is too cheap. Low interest rates discourage savers. It makes saving look like the wrong thing to do.
Recently our Bank of Canada (BoC) hinted that interest rates might actually rise.
(Personally, I’ll believe it when I see it.)
This is because we’ve had speculation the BoC would raise rates for many years now – and haven’t.
What are we going to do???
I’ll tell you:
- Continue to slay the mortgage dragon
Since our total debt comprises of only a fat modest mortgage we’ll continue to focus on killing our mortgage regardless if rates rise or stay the same.
Money is cheap now. It makes sense to kill some debt.
This is counter to what some folks might be doing – taking on more leverage but that’s not smart. Rates will go up eventually. When they do, we’ll have less debt.
We’ll do this by making our base mortgage payments and making additional mortgage payments where we can – that’s actually one of our financial goals this year while debt is cheap.
Lowering our principle today while money is cheap will mean less costs to finance at a higher rate in the future, a few years from now.
Should the rate rhetoric continue for the next 4-5 years, and rates never move, we’ll be close to being mortgage free thanks to paying back our mortgage while debt is super cheap.
Having little to no debt burden in our late-40s will not only feel amazing but it will provide us with some significant financial flexibility. For one we’ll own our home worth over $600,000 free and clear at the time of this post.
- Continue to set aside at least 10% of our net income for investment purposes
After debt obligations are done, we pay ourselves first.
Since I wrote this old post while our income has gone up and our debt obligations have gone down the premise remains the same – we treat savings for investment purposes like a bill payment to Us Inc.
- Payments to Us Inc. are automatic. Every month, money from our chequing account is automatically transferred to our investment accounts. This money is treated just like any other bill payment around our house – a necessary expense.
- Payments to Us Inc. are not to be touched. Like any bill payment, once it’s paid, you rarely get an opportunity to get your money back. Once the payment is gone to the payee, us in this case, that’s it. For example, money that flows into our Registered Retirement Savings Plans (RRSPs) each month is not spent. It’s for our financial future and therefore not to be withdrawn.
In addition to RRSP contributions, we save throughout the year for our TFSA contributions (each January we strive to max out our TFSA contributions at the start of the year). In doing so, I’ve been fortunate to maximize both the TFSA first and then RRSP account. My wife still has some RRSP contribution room left but then again, if we keep up our savings habits, that account should be maxed out in another year or so.
This means in the coming years regardless of what interest rates will or won’t do we’ll have taken care of what we can control:
- Control our debt burden,
- Maintain our modest savings rate for investment purposes.
As you may have concluded by reading this post we don’t worry about interest rates very much.
Sure, rates may go up or they may go down but we have no control over that.
When it comes to money management that means we only focus on what we can control:
- our diligent debt payments, and
- increasing our savings rate for investment purposes.
We have some fun with any money leftover. Case in point, like our recent weekend trip to Prince Edward County to attend a wine and cheese festival. Good times for sure…
I suppose you could worry about higher interest rates but I suggest you don’t.
Focus on getting a good financial plan in place. Focus on sticking to it. After that I think you’ll find you’ll spend far more time enjoying life instead of worrying about interest rates or anything else.
What are your plans for higher interest rates? Do you think about them the same way I do?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
With low interest rates, we’ve accelerated our investing and forgone the mortgage slaying. When we bought, our mortgage rate was 5.15% and we hammered away on the debt, effectively halving it in six years. When it was time to renew, (almost four years ago, we managed to half our rate and now it’s 2.3% (on a variable). We pushed the amortization out to 25 years ago, and started socking away the difference into things like RRSP and RESP and TFSA accounts. When we can no longer find a sub 3-3.5% on any term, we’ll switch it around again and get the mortgage paid off in 4 years.
So long as you’re doing mortgage or investing, it doesn’t really matter which you choose.
“When we bought, our mortgage rate was 5.15% and we hammered away on the debt, effectively halving it in six years.”
Smart.
We’ve been fortunate to max out all my registered accounts so investing heavily in a taxable account right now will not do me any good – so a good place for us to invest/kill debt is our mortgage. I might relax a bit on the double-up mortgage payments soon in order to pay cash for a newer, used car though. I’d rather not take on new debt.
I think killing debt or investing or both is always a good plan.
In the last fifteen years of fee simple title to their home. My parents spent on average $700/month.
A home is just that a home and it costs money even when the mortgage is gone.
Yes the borrowing binge has a price that we all collectively pay.
Good to hear from you David. Yes, a roof costs money regardless if you rent or own. I feel the borrowing binge won’t end well.
I feel like the ones who have to worry the most would be those of us with big mortgage debts, especially for those with a variable mortgage or a fixed mortgage that is due for renewal in the near future. For those people, they better be able to handle the higher interest rate payments (in case BoC decides to increase more than just 25 basis points over the next year or two). Otherwise…
Luckily, I have a fixed mortgage not due for renewal soon, but I will have to chop that mortgage amount down as much as I can. Other than housing, I would love to the higher rates for better interest on savings and my bond holdings!
I think so Peter, re: those that have large HELOC or mortgage. We hope to be debt-free (forever?) in another 4-5 years. We’re working on it anyhow. How long is your mortgage for? Term? Amoritzation?
I’ve got a 4 year fixed at around 2.35%. Pretty decent rate IMO. Nowadays, rates are a bit higher already. Still got 3 years left on the term. I am looking to port the mortgage maybe to another bigger mortgage if I upgrade my dwelling to a larger one (since rates may be higher in the near future). Looking around to see how to do that and whether I have to pay any early discharge fee. Know anything about that Mark?
2.35% is historically excellent Peter. Well done. You will likely have to pay a discharge fee/the goodbye kiss sine all mortgages are legal documents.
https://www.canadianmortgagetrends.com/2008/03/discharge-fees/
Older schedule but you get the idea, the updated fee will be in the ‘fine print’ of your mortgage documents.
Put me in the camp of preferring higher rates than what we have had for to long now. HISA, GICs, bonds all should pay more for responsible savers. This could have more benefit with “real” cash (not debt) for people and contribute, not hinder net worth growth. I’m not convinced we even needed the last 2 drops in rates. The US rate is rising steadily, our most recent GDP growth was 3.7% amongst the highest of developed countries, inflation is running consistently below target, employment is rising. Therefore I’ll go out on a limb and say rate hikes are coming, and real soon, and possibly more than people think, over time. If rates don’t rise soon, I hope we find a new bank governor.
Artificially boosting the economy by getting the people who don’t have money spending with debt isn’t productive in the long run IMO, and has too many risks attached. Too many people of all generations have gorged on debt at these absurdly low rates, resulting in record personal debt, excessive government debt in relatively good times, extreme home price increases in bigger markets, and a potential future cost to all consumers/taxpayers through defaults. Leading the world in personal debt loads isn’t something I’m proud of as a Canadian. I fear this will end badly for many folks, and possibly even for those of us who don’t have personal debt now, but own companies exposed to it.
End Rant.
No problem with the rant….I agree….artificially boosting the economy by getting the people who don’t have money to spend money isn’t very good.
But, this is what our economy is endorsing.
We’re having fun for sure but we’re also working on our debt load over time, and it’s coming down. I really feel for people that can’t get a handle on their budget, don’t make enough to get a handle on their budget, or both.
Your debt load is well planned and managed and you actually have a serious plan to eliminate it soon. Good for you and others making efforts and progress. Be thankful to be not paying the 11-12.5% rate on the 2 mortgages we had from the mid 80’s up to May1995.
Perhaps I need to have more compassion for those not doing well. Some definitely are struggling through no lack of effort on their own especially in expensive markets or where employment is difficult. But…..it seems to me increasingly people aren’t making very good financial choices and haven’t done much to help themselves. Not much different to me than so many with unhealthy lifestyle choices, that are unconcerned and complacent about diet and exercise for themselves and setting better examples for future generations. Another area that has huge costs to society now and is growing rapidly. (obviously another of my pet peeves!!)
To answer the original question: My plan is stay out of debt for the remainder of my life, benefit with FI whenever rates do go up, and hope this isn’t a house of cards that will harm people and our economy.
I would agree with the financial choices part. I simply don’t understand why I see so many parents giving their kids new tablets, new iPhones, other. Some as early as age 5. Then I hear them complain about their kids watching their tablets all the time. Go figure.
If I wanted anything other than a bit of gas money as a teenager I had to work for it; use my own money. Kids today are spoiled rotten. I suspect this is where a good portion of money goes – to feed kids’ consumerism.
I have no doubt you’ll continue to stay out of debt for the rest of your life.
LOL, no kids adult = arm chair quarterback. I understand!
Virtually nothing was given to me as a kid either, and the things I did get had a TINY value compared to stuff young ones get today. I started working F/T at 16 while still in high school and years before that doing all kinds of things, to get what I wanted. I don’t have a tablet and my phone was 2 generations old when I got it and no is about 4-5 generations old.Ha
I saw a documentary report the other day that showed very young children using electronic devices are very developmentally challenged- 6 mths to a year in speech and some other social things. Not good.
Glad you have faith in me staying out of debt.
“I saw a documentary report the other day that showed very young children using electronic devices are very developmentally challenged- 6 mths to a year in speech and some other social things. Not good.”
Sad.
I don’t have any debt so I do not think of interest rates on that kind of a personal level. I do worry about the effect rising rates will have on the overall economy though. I’m certainly not smart enough to be able to forecast the “what if” of rising rates. In terms of investing, one either has to hope and hold on or bail out.
Yeah, I try to avoid the “what if” game. I’ve learned over the years I’m better off not guessing. I’ll be wrong most of the time with the experts 🙂
I’m with you I don’t think they will go up if they do it will be so miniscule. Higher rates mean higher interest hopefully you are making. Also better real estate deals for people with money
You’re right. That should happen. It will be interesting to see what BoC does. Maybe 25 basis points but that’s about it.
When interest rates do begin to rise, I hope they never hit the double digits we had in the mid 70’s. Of course we are retired, no debts and a rising annual income from our investments.
I don’t think they will ever go that high again due to demographic shifts. I could be wrong of course but once I’m debt-free and once I’ve reached our income goals, I won’t care too much. Higher interest rates will help savers (eventually?) and curb consumption to a modest degree.
I remember those double digit interest rates with clarity. Prime actually peaked August 1981 at 22.75%! ouch! and then stumbled around in the low teens until 1991.
I can’t imagine 22+%! Damn! Great for savers 🙂