Interest rates have been near all-time lows for awhile now but that all changed on March 2 when the Bank of Canada (BoC) hiked its benchmark interest rate to 0.5 per cent.
While the BoC was quite vocal in past that hikes were coming, its statement March 2 acknowledged inflation is heating up even faster than anticipated, which indicates it may be more aggressive with more hikes in the near future.
While moving from 0.25% to 0.5% is not a large increase in itself, this move is expected to be the first of a series of rate hikes this year, an attempt to tame inflation that has risen to its highest point in decades. This means it is time to revisit your financial plan.
Many people assume that financial planning is mostly about managing investments. But true holistic planning is about much more than that. A real financial plan will look at tax strategies, retirement planning, estate planning, cash flow management, debt management and much more.
Rising interest rates can have an impact on many aspects of your financial plan, but certainly for many Canadians, the number one area of concern is their mortgage.
To understand how these rate increases directly affect a mortgage, it helps to look at the numbers.
A rough estimate for illustration purposes is that the increase to your mortgage payment per $100,000 of mortgage owing would be $12.50 per 0.25 per cent increase in prime on a 25-year amortization.
Using the above estimates on a $700,000 mortgage means this first increase would bump interest costs up by $87.50 per month.
So if you have a variable rate mortgage (or when you go to renew your fixed rate one), these added costs need to be factored in. While an extra $87.50/month may not sound like too much, it can become pretty substantial if we see the 4-5 more hikes that are anticipated in the next 12-18 months.
With one rate hike already done and more on the way, now is a great time to review your plan and determine what steps you need to take to prepare your mortgage (and other debts) for this rising rate environment.
While not exhaustive by any means, some strategies that you might consider are:
• Restructuring your existing mortgage to protect yourself from future rate hikes
• Locking in your existing variable rate mortgage to stabilize future payments.
• Improving your cash flow by consolidating higher interest rate loans or debts and using that extra cash to increase debt repayments.
• Utilizing home equity to help meet other financial goals.
• Temporarily pause contributions to retirement savings accounts in order to pay down any high-interest debts.
As always, the right plan and strategies for you will be unique to your personal situation. So with the expected rate hikes now underway, take the time to review with your financial planning professional.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.