In a move that surprised many analysts and economists, Bank of Canada Governor Tiff Macklem announced in late January that the bank would be holding its benchmark interest rate near zero.
After nearly two years of ultra-low rates, and with inflation hitting record-setting highs every month, many were expecting the bank to raise its key rate quickly.
But even if it didn’t happen in January, a rate hike is on the horizon — likely before the snow melts. And that means variable-rate debts like credit cards, HELOCs and some mortgages will soon become more expensive.
What does that mean for consumers? Now may be the perfect time to splurge on something fun — or take out a loan for something practical, like a new car to replace that old pile o’ junk that won’t start anymore. Here are five money moves you should make before rates rise.
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1. Consider switching to a fixed-rate mortgage Mortgage rates fell to record lows during the pandemic, and eager home buyers went wild.
Although house price growth has been red-hot — and it’s not expected to cool anytime soon — incredibly low rates made homes more affordable for some prospective buyers.
But if you were enticed into a variable-rate mortgage, it may be time to think about converting it to a fixed-rate loan. That’s because as soon as the BoC raises its interest rates, banks and lenders will follow suit on their variable rate loans.
But fixed-rate loans are guaranteed for a certain period of time, which means this type of debt won’t be affected immediately by higher interest rates.
The same goes for reverse mortgages or home equity lines of credit (HELOCs).
Savvy borrowers should look at all their options. If a variable rate mortgage is considerably cheaper, then it may still be the right type of loan for you. Especially since, compared to fixed rate mortgages, they’re usually easier and cheaper to break if your situation changes.
But if you’re looking for stability and predictability in your mortgage payments, locking in a fixed-rate loan may be your best option.
2. Work on your credit score Since the best interest rates are reserved for those with excellent credit, anyone whose credit score is less than impressive could find their borrowing costs become expensive.
To improve your chances of getting favourable rates once the BoC starts tightening credit, you may need to pay down existing debt and take other steps to raise your credit score.
While there are a handful of factors that influence your score, your payment history and the amount you owe account for a major chunk.
Stay on top of your payments and avoid maxing out your credit card — even if you plan to pay it off before the end of the month. And avoid taking on new loans or applying for other credit for a while; that can cause your score to drop.
Boosting your credit score will make you a more attractive borrower to all types of lenders — from credit-card issuers to those offering mortgages.
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A poll from CIBC late last year shows one in five Canadians are making paying down debt their top financial priority this year.
But many continue to struggle with their debt load. Of those who took on more debt last year, 37 per cent told CIBC it was because their expenses exceeded their monthly income.
If you’ve been relying on your credit cards to make ends meet, the expensive interest adds up quickly. And as soon as the BoC raises rates, you may find that pace will increase.
Anyone carrying a balance on their credit card should clear as much as they can before rates go up. If that’s not an option, rolling your balances into a lower-cost debt consolidation loan could help you save a substantial amount of interest and help you get out of debt sooner.
4. Put your stock in the market Interest rates are so low that the rates on savings accounts will remain puny, even if 2022 brings multiple BoC rate hikes.
If you’ve got the appetite to take on a bit more risk, consider putting some of your savings into investments. While the market has been volatile recently, experts haven’t given up on it and neither should you.
But you should still be a little more discerning about your stock picks in these uncertain times. Consider investing in “defensive” businesses that do well during volatile periods.
Think consumer products like the Oracle of Omaha Warren Buffett’s beloved Coca-Cola. Or banks, which tend to do well when interest rates rise. Most of Canada’s big five banks also pay dividends to their shareholders, which offers a nice extra boost a few times a year.
5. Revisit your budget Now’s the time to buckle down and find some fat you can trim in your budget. While you can’t do much about the rising cost of groceries, gas and your debt, you may still be able to find room in your current budget to lessen the impact of rising rates on your bottom line.
See if you can streamline your streaming services, reduce your cellphone’s data plan if you’re just using Wi-Fi at home, or plan to make dinner together at home instead of going out for date night. Before long, you may notice you have a little more breathing room.
And if you don’t already have a formal budget, it’s time to draft one. There are all sorts of free budget tools available online, including one from the Financial Consumer Agency of Canada.
According to the FCA’s data, people who don’t use a budget are twice as likely to fall behind on their financial commitments. They are more likely to spend more than they earn, and more likely to have to borrow to meet their needs.
About the Author
Sigrid Forberg Reporter
Sigrid is a reporter with MoneyWise. Before joining the team, she worked for a B2B publication in the hardware and home improvement industry and ran an internal employee magazine for the federal government. As a graduate of the Carleton University Journalism program, she takes pride in telling informative, engaging and compelling stories.