What to do when interest rates rise?

Interest rates in Canada, and around the world, rise and fall just like the investment markets. They’re like the weather in that there’s really not much you can do about it, except deal with it. What we can do, is make sure that we are well-educated on the topic, and be prepared for what happens when the interest rates inevitably rise. 

As you may know, interest rates went up 4 times in the last year, and there is reason to believe that it may continue to do so until the year 2020. Before we begin, first let’s learn why interest rates rise. 

Why do interest rates rise? 

Like most things in life, interest rates are largely determined by supply and demand. In a time when the economy is doing well, and markets are going up, as are housing prices (sound familiar?), people are more likely to want to borrow money in order to invest, whether it be in real estate, their own business, or the stock market.

With demand for borrowed money going up, banks are now able to charge higher rates. The government can also play a part in the rising interest rates using monetary policy. Along with lots of market growth comes inflation. In order to keep inflation at a manageable rate, the central bank may choose to raise interest rates as well. All of this combined results in higher interest for the end consumer, you.

With that in mind, here are some tips on what you can do to protect yourself in a rising interest rate environment.

Learn about your mortgage

Mortgages are a tricky business. There are quite a few moving parts to a mortgage, but if you’re like most Canadians who own property, you most likely have a mortgage. Mortgages come in many forms, such as fixed term mortgage, variable mortgage, and an interest-only mortgage. What type of mortgage do you have? For example, if you had a 5-year fixed term mortgage, and it’s going to be renewed in 2 years, you’ll have some time to prepare for the potentially higher payments.

Budget to pay down your debts

Aside from your mortgage, there will probably be more debts that you’re carrying. Find out if these debts have variable interest rates that changes, such as a personal line of credit, student loans, or some credit cards. If the interest rates on certain debts are changing, you may have to change up your budget to prioritize different payments.

Think carefully about new debts

Even if you can afford to take on a new debt today, consider the fact that interest rates may continue rising. Would you be okay if the interest rate went up another 1 or 2%? For example, a loan of $10,000 would cost $500 a year at 5%. At 7%, it could cost $700. This is a small example, but if you’re already making payments of thousands of dollars, a small increase in interest will quickly add up to a difference of several hundred dollars. Use our easy and quick calculator tool to find out how much money you could qualify to borrow, and how much it will cost!

Change up your investment strategy

If you have a diversified investment portfolio, you will probably have a portion invested into fixed income. Bonds, for example, lose their value in a rising interest rate environment. Interest rates rising may be an indicator of changing market conditions, so speak to your financial advisor to make sure you’re prepared!