Budgeting for interest rate hikes

Contributed - Jan 15, 2011 / 5:00 am | Story: 59386

Interest rates, near historic lows for much of the past two years, are widely expected to increase through the latter half of 2011. The cost of carrying debt, including mortgages, lines of credit and credit cards, will be affected.

“Low interest rates have enticed many Canadians to spend more on credit,” says Stephen Reichenfeld, VP and wealth counselor, Fiduciary Trust Company of Canada.

“But an improving economy means lending rates will likely rise. It’s important to take steps today and prepare for potential higher borrowing costs in the years to come.”

Four steps that can help you prepare to come out ahead:

Reduce personal debt. Do what you can today to decrease your debt load before borrowing costs increase. Review the option to lock in borrowing costs now and consolidate debt at a lower interest rate. If you’re only making minimum payments on your credit cards, start paying more.

Rethink your mortgage. If you have an adjustable rate mortgage, and you plan to be in your home for at least five years, consider refinancing options such as converting to a fixed rate mortgage at current rates. Speak to your mortgage broker to discuss your options.

Equity funds. Stocks tend to benefit more than fixed income products like bonds in a rising interest environment. Past market cycles indicates sectors like industrials and technology benefit when interest rates rise.

Don’t hesitate on a major purchase. Consider accelerating your plans to purchase now before interest rates rise. If you’re in the market for a new car, there may be zero percent financing and other incentives available. These offers often disappear as rates rise.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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