Weekend Reading – How lower interest rates might help

Weekend Reading – How lower interest rates might help

Hey Everyone,

Welcome to a new Weekend Reading edition about interest rates – specifically how lower interest rates might help you out!

In recent Weekend Reading editions:

Weekend Reading – Does Sell in May work?

And…

Weekend Reading – How does the 30-30-30-10 budgeting rule work?

Weekend Reading – How lower interest rates might help

First up, a chart demonstrating recent interest rates – they are not that bad from a historical perspective.

Weekend Reading - How lower interest rates might help

Source: thanks to https://wowa.ca/banks/prime-rates-canada

That said, these are tough times for many given higher interest rates were not on the radar of many Canadian consumers – interest rate spikes caught most off guard – despite a period of very low, prolonged rates beforehand which was a massive anomaly.

Dirt-low rates provided a huge opportunity for first-time homebuyers and other borrowers after The Great Financial Crisis since low rates made the cost of borrowing cheaper and buying a home much easier in some markets. That was one side of a good, historical story. The flipside: with interest rates so low for so long, they could only go up. When that happened a few years ago and stayed that way, your monthly mortgage payments or other borrowing costs went up – dramatically and quickly. Low rates countered by a fast uptick in rates has likely caused significant anxiety amongst millions of Canadian homeowners and borrowers in recent years since higher interest rates impacted both their spending power and their existing debt burdens.

The good news is, it seems interest rates might come down a bit (more) in 2024. This week’s interest rate cut seems like a positive start in that welcomed downward direction.

What does that mean for your mortgage?

Banks lowering their prime rates will have an immediate effect on borrowers with variable-rate mortgages, just as they’ve felt the brunt of rising rates in recent years. Those with a fixed-rate mortgage will not see their payments change until mortgage renewal time. This is because fixed-mortgage rates are determined by what happens to the bond market, which, while also affected by any Bank of Canada rate decision, is based on overall investor confidence. That market had already largely priced in the rate cut.

While a 25 bps interest rate cut doesn’t seem like much…someone with a $600,000 mortgage, 25-year amortization and a 6% interest rate would save about $88 a month if the rate was 5.75%.A full 1% percentage point off the $600,000 mortgage would translate into much more: closer to $349 a month in savings.

Here is another example from Scotiabank (no affiliation):

How lower interest rates might help

What does that mean for your line of credit?

Lines of credit are generally tied to bank prime rates, so borrowers should see some savings if they have lots of debt on their lines of credit.

What does that mean for your savings?

Modest changes.

Savings accounts in recent years have yielded higher returns but recent cuts and any further cuts will see declines on such products over time.

What does this interest rate cut mean to us?

Nothing. 

I’ve mentioned this on my site before: certainly interest rates play an important role in the economy. Interest rates affect all of us but not necessarily in a good way like some of those examples above. 

Years ago, before rates spiked, I listed a few pros and cons tied to our (prolonged) low interest rate environment. We believe we took advantage of that. 

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.

Back to us, our plan, our objective was to avoid lifestyle inflation even when money was dirt-cheap. In fact, we killed debt more aggressively because it was cheap to do so and those lower rates may not be seen again anytime soon…

We focused on two things during the prolonged, low interest rate period knowing rates would eventually go up:

  1. We focused on our mortgage payments, and
  2. Where possible, we increased our savings rate for future investment purposes.

Fast forward to today:

Our mortgage is long since dead. 

Mortgage free!!! Now what???

We don’t have any line of credit debt. 

The savings we tucked away now earn 4%+ on such cash savings / cash equivalents. 

In the coming months, we hope to pay cash for a newer car to replace our aging one.

And finally, we continue to be in savings mode for the following in 2025:

  1. Own more low-cost ETF XAW for diversification beyond Canadian borders inside our registered accounts.
  2. Increasing our cash position such that if we need/want to make any registered withdrawals from our RRSPs in particular, starting in 2025, the cash / cash equivalents will be there for that and we won’t need to sell any equities/stocks at all.
  3. Investing in more Canadian dividend paying stocks in our taxable accounts when we feel the time is right to do so. 

In closing, lower interest rates might help many Canadians and consumers but at the same time, based on our lessons learned, I also believe many Canadians should consider how to manage their financial affairs almost irrespective of what interest rates might be since you have no control over that. So, the punchline is, the more you can take financial planning into your own hands vs. others the better off your outcomes could be.

Weekend Reading – Beyond how lower interest rates might help

As part of some recent reading I came across this older article: it was interesting to see how the S&P 500 performed without its FAANG stocks.…although now that we’re well into 2024, other stocks in other sectors seem to be coming around beyond tech.

I think the same could be said for Canadian stocks too. The TSX might turnaround and accelerate even higher in 2024 if interest rates come down more. What say you?  

Weekend Reading – TSX turnaround edition

Back to the subject of credit cards and taking on some debt, including hacking them for constant rewards, I’m not sure that’s worth it. We focus on a handful of credit cards in our house and that’s it – we keep it simple and focus on very few cards for rewards. Of Dollars and Data wondered if constantly chasing credit card rewards was worth it too.

For those into bonds these days for portfolio stability and some higher returns of late, Morningstar shared 3 great Canadian bond ETFs for 2024.

I still don’t own any bonds here and I know other DIY investors who follow this site feel the same. That said, I keep a healthy cash or cash equivalents balance and that balance is growing every month. 

Then and Now – Revisiting the need for bonds

Dividend Daddy has no cares about interest rates – he simply plows money into his investments month-after-month. He also believes dividend investors and total return investors are both right and wrong. 

His post was great but when it comes to these debates and anyone criticizing how Dividend Daddy or other DIY investors may invest – I simply ignore the drama now since if you don’t like owning individual stocks for income and growth – then don’t. 🙂 It’s that simple. 

When it comes to any financial arguments and picking apart how others invest, I feel this way:

Keanu

Dale Roberts mentioned Canada was bracing for interest rate cuts too. As mentioned above, we’ll see if more cuts happen this summer or fall. 

I have received a few great emails from readers after this post was published below How I built my dividend portfolio so I hope to tackle those in an updated post or highlight those reader thoughts in a future monthly dividend income update. Stay tuned for that! 

How I built my dividend portfolio

Whether you are building an indexed portfolio or a dividend portfolio or anything in between, have a great weekend.

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.

24 Responses to "Weekend Reading – How lower interest rates might help"

    1. Great to hear from you, Cliff.

      Personally, I don’t own any and no plans to do so. I’m not a huge fan of covered call ETFs/higher-yielders focused ETFs if that’s what you mean. I like and prefer some simple stuff: 1. passive income from our basket of CDN stocks, 2. passive income from our US stocks, and then 3. growth from our low-cost ETFs.

      For a very quick example, if you compare the returns of a HCAL vs. ZEB vs. XIU – you’ll see the yield-focused HCAL is pretty much the same as ZEB over the last 5-years (whereby you could also own the top-6 banks directly instead of ZEB) and even then, XIU has been better than both HCAL and ZEB. 🙂

      I usually believe any high-yield products are designed to give up something, usually price gains/capital gains which are very important to total return of course.

      Thoughts?

      Cheers,
      Mark

      Reply
  1. Hi Mark: Mind if I rant? This is both political and financial. A few months ago I said to my brother that the Liberal Party was done and he was aghast and wondered why I thought that. I said that Trudeau had no one to blame but himself and he did it years ago. My brother asked why I thought that so I said that it started with Covid. Why did I think that. Well I said OFSI told the banks that they couldn’t raise their dividend and had to put more aside for bad loans which they did. Then a couple of years later OFSI said to the banks that they could start raising dividends so the banks made up for lost time and really raised them. the government saw this and thought we would like some of that money also so they slap the banks with a 1.5% tax on their profits and 5% on all profits over a billion dollars for the next 5 years. The banks are shocked as the government and the banks usually have a very cozy relationship. Now the government plans to raise the rate on Capital Gains to 66 2/3 from 50%. Also we seem to be headed to an election. I can just picture the discussions between the Liberal Party and the banks when the Liberal Party wants a loan to help to pay for their election expenses. If I was the banks I would tell the Liberal Party that they could get their money elsewhere after being treated so shabby and I’m sure there are some companies who would lend the Party some money but I think there would be a lot who wouldn’t since they seem to be against big business. Less money for elections not much of a chance to succeed. It just goes to show you that you shouldn’t bite the hand that feeds you. On another note in the Budget there was $8.5 Billion for housing and $1.5 Billion to grease the wheels for housing but the Federal government hasn’t been in housing for years as they down loaded it to the provinces which downloaded it to the municipalities. So why is the government attempting to get back into housing again. Seems to me that there is $10 billion that they could save and would that help to not raise the Capital Gains rate.

    Reply
    1. Rant away, in a respectful way here!

      I will say I certainly struggle with our government and it’s decision-making. Something has to change – we are not trending to a good place.

      Mark

      Reply
  2. RONALD S. TUTHILL · Edit

    Hi Mark: I agree with your second and third points. As my dad used to say, Stick to your own knitting. If you are into real estate, ETF’s, covered calls, options, bonds, oils, GIC’s or any other form of investing and you are comfortable with it than good for you and continue but I will stick to blue chip stocks and collect the dividends as I find it easier and less complicated and I understand it. It’s basically worked for the last 55 years with only a few hiccups along the way which I put down as learning experiences. The cash in the cash account builds up all the time and I use it to buy other stocks but if I think that prices are high then I take a breather and let the cash accumulate. Since I don’t buy $100.00 stocks the cash account has accumulated and is now over $1.0 million. If stocks drop in price then I will have the money to buy more stocks and if I have to pay a large bill then I will have the money to transfer to my checking account to pay it and will know that it will soon be back and larger than it was. Like all investors I’m greedy and want the most for my money so that means buying low and selling high if I see the need to sell at all. Adding to a solid portfolio means more shares and more dividends to add to your cash account. Being out of work at 43 I have seen a few cycles since and all down cycles since it is the market and analyst can talk any stock down I have found to be buying opportunities.

    Reply
    1. Thanks, Ronald. A good phrase: “Stick to your own knitting.”

      That’s my bias. I collect the dividends and price growth and I index beyond Canada for the most part for global growth although I continue to own a handful of U.S. stocks right now like BRK.B, BLK, WMT and WM.

      I also like buying more shares when prices tank – hence the need to keep some cash handy now and then!
      Mark

      Reply
  3. Great post as always.

    Question for clarity. You wrote:

    “Increasing our cash position such that if we need/want to make any registered withdrawals from our RRSPs in particular, starting in 2025, the cash / cash equivalents will be there for that and we won’t need to sell any equities/stocks at all.”

    If you make a withdrawal from your RRSP, the only way I know how not to sell equities/stocks in your RRSP, is to withdraw earned dividends/distributions only. In that case, your cash position is irrelevant (beyond the fact that a cash position may mean you don’t need to withdraw even the dividends/distributions from your RRSP.

    Reply
    1. Lloyd (64, retired at 55) · Edit

      “is to withdraw earned dividends/distributions only”

      I believe that is exactly what the cash position is made up of. I seem to recall Mark mentioning turning off the DRIP to build up the cash position.

      I did the same thing. Discontinued the DRIPs prior to RRIFing to build a surge tank of reasonably accessible cash. Haven’t used it yet and in fact continue to increase it. But it will likely be utilized once the RRIF minimum withdrawal factor exceeds the yield of the equities *and* selling some equities is unreasonable (low market prices).

      Because of one of the inherent flaws of the RRIF, having a cash position to weather temporary conditions could also come in handy in the short term.

      Reply
      1. Yup, you know what I am doing….by stopping DRIPs inside RRSPs x2, the cash is building up. I will have cash for Year-1 of RRSP withdrawals soon (for 2025 if/when needed?) and the cash balance will continue to build up (with some buffer) for Year-2 of RRSP withdrawals in the coming year – ahead of time before I need it.

        I’ve learned from other successful retirees they stopped DRIPs (inside registered accounts) and let their cash position go up, to cover Year-1, Year-2 and sometimes Year-3 of future RRSP withdrawals well in advance of what they needed. They don’t regret that decision and I hope to do something of the same…right now.

        Mark

        Reply
    2. Thanks very much.

      Well, we want a bit of cash buffer beyond just withdrawing the dividends and distributions from the RRSP. The RRSP assets, including lower-yielding/growth-oriented stuff don’t churn out enough cash to cover all expenses so we tend to keep a bit of cash or cash equivalents there such that if we need a larger RRSP withdrawal the money is there and we don’t need to sell any stocks/equities.

      We’ve also turned off all DRIPs inside both RRSPs such that the cash position builds up over time.

      Example, not real-life:

      1. DRIPs inside RRSPs x2 turned off.
      2. RRSPs x2 generate $25k per year combined in income. Income stays in cash.
      3. Raising/keeping $25k-$30k in cash for 2024 inside RRSPs and then let RRSPs generate another $25k in cash per year on top of that for the following year….

      This way, I don’t have to wait until stocks/equities pay dividends, I have the cash ready for withdrawals and in the coming year cash balance builds up again.

      We will eventually sell stocks/equities over time in our RRSPs, just not in the early semi-retirement years. That’s the thinking.

      Thoughts?
      Mark

      Reply
      1. Thanks for the details regarding cash build up. I’m retiring in a few months and have been debating when to stop the DRIP(s). On a separate note, I hope the Redblacks provide some entertaining play for the dedicated Ottawa fans – just not too entertaining when they play my Ti-Cats

        Reply
        1. Gosh, so many Ticats fans around!?

          🙂

          Thanks, Jimmy. Yes, I figure stopping all DRIPs will work for us but I won’t really know until I get there. I just know it will be nice to have the cash/cash equivalents ready for withdrawals without selling any stocks in Year-1 or likely Year-2 of retirement.

          Mark

          Reply
    1. That’s very good, HJ and I just noticed that this weekend. A very good rate. I think anyone getting 4.5% or so on their cash savings is doing well. I recall we’re earning about 4.55% right now.

      Have a great weekend and thanks for flagging that for all readers. 🙂

      Reply
  4. I was a passive investor with ETFs but that didn’t work when the bond market tanked with higher interest rates. I’m all for the hybrid approach – getting the best of both dividends (lower return than equities but much better than bonds) and equity growth. This is especially useful for retirement when there is a focus on cash flow. I experienced the flaw in the completely passive balanced portfolio – lesson learned. It’s all great to say that equities have a higher return over time, but that doesn’t help when you need to start living off the investments and stocks are down (sequence of returns risk). I can see how dividend investors who started early have so much more cash from dividends than I ever will because I began investing in individual dividend stocks later in life.

    Reply
    1. Passive equity ETFs are fine until the stock market drops by 30%. It can happen again.

      I’m biased of course but I do like the hybrid approach and it’s working so far for us to help us meet some financial goals.

      I get your point 100% – “…I experienced the flaw in the completely passive balanced portfolio – lesson learned. It’s all great to say that equities have a higher return over time, but that doesn’t help when you need to start living off the investments and stocks are down (sequence of returns risk).”

      Pros and cons to the dividend income approach, yes, you get the money but the stock price might not rise as much as it could if the money stayed with the company. I feel it’s a tradeoff but one I’m fully willing to accept. I anticipate in the coming months, our dividend income should be approaching $46k per year from a few key accounts (not all of them) which is good and should meet many expenses for us.

      How are things with you Sandra, are you investing inside your corporation or just building cash or other investing now?
      Mark

      Reply
      1. I’m still investing in the corp. but will stop soon – leaving a cash cushion just in case. I continue to invest my dividends (not DRIP, but essentially the same idea). I will need to stop doing that soon too, to build up cash for when I switch to the retirement plan. I’m still deciding if I enact the retirement plan ~Jan 2025 or a bit later. We are dependent on some legal changes with the company to move forward on that, one of which is out of my control so I’m in a holding pattern. 🙂

        Reply
        1. Great stuff.

          I’m letting cash accumulate inside my corp. now. I have gone back and forth about investing inside the corporation but the cash position is helpful and allows me to know I can take out a bit of money next year or the following year via dividends and live off that.

          You sound like me without the legal stuff, re: I’m still deciding if I enact the retirement plan in 2025. I probably will. My wife has just started to work 3-days per week which is excellent for her.

          Keep me posted!
          Mark

          Reply
          1. I have a substantial cash position in the company, some in a gic and the remainder in a higher interest saving account (not as good as what I can get in a personal). The intent is to fully cover us if there’s a bear market. Dividends from personal +corporate +cash to cover expenses +some travel for 4-5 years. I am sure it’s inefficient but I sleep at night:)

            Reply
            1. Seems excellent. We are trending the same way. I figure with existing cash inside our corporation, I could likely cut back spending and live off that for at least one year alone without anything else (if a major bear market occurs).

              Our goal is to have dividends + distributions from the personal portfolio to cover most basic expenses without selling anything. I figure that’s about $54k per year from RRSPs x2 + Taxables x2 in particular. I hope to update my post later this month for May.

              About $9k per year away from our long-term goal (in 2025/early 2026??) and trending to $48k per year by the end of this 2024 calendar year, hopefully, markets and raises willing.

              https://www.myownadvisor.ca/april-2024-dividend-income-update/

              Reply
  5. Lloyd (64, retired at 55) · Edit

    I’ve pretty well accepted that the apex of interest income has arrived (or at least very very close to it). Only 1 smaller GIC left at <2% (ouch) to mature and renew this fall. A 1 year term bought last year (5.5%) will likely be renewed for 5 year term this summer so it will obviously be at a lower rate. And renewals after that will likely be even lower if rates descend as expected.

    I may consider splitting off some of the funds at renewal and plough that back into equities, will cross that bridge when I come to it as rungs in the various ladders mature.

    All in all it was a *great* ride as rates ascended, so no legitimate complaints here.

    Reply
    1. Very wise on the 1-year GIC at 5.5% – great deal and if you can get 4.5-5% for another 5-year term that would be pretty good IMO since rates are likely to fall more, I think, in 2024.

      Reply
  6. (RBull) deane hennigar · Edit

    Another great column.

    Agree with you full bore on money is too cheap. That caused a lot of overspending by consumers, home buyers and governments.

    Also agree on debating how others invest – I’m past caring, lots of ways to do it, prefer to focus on my own stuff, what I can control and own that.

    Reply
    1. Thanks, Deane. Our government and some consumers are certainly in a fine mess – which brings me to your second point that I’m done with the debates on stuff like dividends vs. other forms of investing. Have fun if you want to argue but I have better and more valuable things to do with my time and money. 🙂

      Have a great weekend to you, chat soon.
      Mark

      Reply

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