Keeping your feet on the ground when rates are sky high.
Earlier this spring we felt light as air as the Bank of Canada’s overnight rate remained on pause and fixed rates saw considerable drops. It was almost as if we were facing down the beginning of the end!
Now, as we head into the belly of summer, we are back at the mercy of high rates and awaiting what some believe could be another increase or two yet to come. But we have navigated high-rate environments before and always come out the other side. So while we are in the thick of it, here are a few things to remember.
Even the experts don’t have a crystal ball
Whenever we find ourselves in complex financial territory, our human nature is to look to the future - to try and guess what could happen to help tell us what we should do right now.
But there’s a catch to hinging our decisions on things that haven’t happened yet - we simply do not know. The jury is out among Canada’s prominent economic minds after May’s inflation numbers dropped significantly to 3.4%. Some state that this could mark a softening in the Bank of Canada’s stance, while others have been quick to point out that without the inclusion of gas prices, inflation is still at around 4.4%, leaving the door open to at least one more increase before the BoC takes a seat. Some predict Canada will likely avoid a fully charged recession thanks to immigration feeding a strong job market and even stronger demand for real estate. In contrast, others are concerned that higher rates will push Canadians to the brink and see mortgage defaults skyrocket.
What’s the takeaway here? So many factors are at play, like economic indicators, global events, and government policies, making it impossible to know for sure what comes next. So, trying to make choices based on what could happen in the future is not only not effective but could end up causing you more stress in the long run. The best thing you can do is focus on making wise financial decisions that work for you and your family right now to strengthen your position, no matter what the future holds.
Prioritize you
The best thing you can do during a rate environment like this is to prioritize your and your family's needs ahead of any what-ifs. For most of us, that will mean ensuring that our mortgage payments and monthly obligations remain manageable and that our budget leaves us with some breathing room.
This could look several different ways, but it should always include looking at your debt management strategy. If you carry a large debt load, you could be more impacted by higher rates, so creating a plan to attack the higher rate, unsecured payments first is key.
This doesn’t have to mean finding more cash each month to pay debts out either - things are already tight enough. But it could mean allocating more funds towards debt repayment, reducing discretionary expenses, or exploring debt consolidation options to decrease your effective interest rate or the average interest rate you are paying between all of your debts and the borrowing power you have with the equity in your home.
By calculating your effective interest rate, you may find that rolling your higher-rate debts into your mortgage through a refinance could save you hundreds of dollars each month. Even if your current mortgage rate is much lower than your new one, it’s worth running the numbers to see if we can get that monthly payment obligation down and give you back some peace of mind while we ride out this rate environment.
Could there be an upside?
One of the most common questions we get asked is, “How long will these high rates last” and, as we mentioned above, we honestly don’t know. But what we do know is that there is plenty of historical evidence to indicate that there are some potential upsides to prolonged periods of higher rates.
First, rates staying elevated generally means that the economy remains robust. When rates hit the floor, it is typically an attempt to spur consumer spending to keep a hurting economy afloat (think back to those historic post-Covid lows). Conversely, higher rates indicate that employment remains strong and people have money to spend. Moreover, a prolonged period of higher interest rates can incentivize lenders to offer more competitive rates and terms, increasing competition in the mortgage and lending market.
Finally, although this one may not feel like an upside, a long period of higher rates helps promote a more prudent approach to personal finance. It’s easy to let our financial strategy go by the wayside when money is cheap, but when the cost of borrowing is higher, it helps to remind us to save, spend and plan wisely. It can serve as a reminder to pay attention to our spending, be intentional about how we borrow, and make more conscious choices about spending for our futures.
Where do we go from here?
Remember that this is not the first time Canada has experienced a high rate cycle, and it certainly won’t be the last. While these rates seem like mountains compared to the low rates we became accustomed to after 2020, the rates we see today are not far off from the “normal” rates we see during a healthy economy. So rather than letting the rates and uncertainty this summer get you down and make you fear the worst, try focusing on what you can do now to prepare yourself for any eventuality.
And remember - no matter what your financial picture looks like right now, you don’t have to do it alone! Our team is here to walk with you through the process, however that looks for you!
