Essential Knowledge Series
Once again, the Bank of Canada will be meeting on September 7th and likely increasing interest rates. When does it stop?
This will cause the following:
Variable mortgage rates will increase
Line of credit interest rates will increase
Home prices might decrease
Canadians will take on more debt because of higher interest payments
Here's why this matters to you, and every Canadian.
As mortgage interest rates increase, if you're in a variable rate mortgage, your payment will increase if it's not a fixed payment. On top of that, any unsecured debt that you carry with a variable interest rate such as a line of credit will increase as well. Both of these will lead to higher payments and less money in your bank account.
Aside from the direct effects of the rate increases, Canadians are likely to see their home prices fall. Every interest rate increase reduces the maximum mortgage amount people can afford. As a result, fewer people will purchase fewer homes and supply will increase while demand decreases. Economics 101 tells us when you have more supply, prices decrease.
Here's what I'm really worried about. Canadian household consumer debt and Canadian consumer savings. See below.
This chart shows a disturbing trend. In 2020, we experienced interest rates decrease quickly and consumer debt plummeting as a result. As consumer debt decreased, household savings increased drastically. This makes sense. Fewer interest payments give Canadians more money to save.
What have we seen recently though? Interest rates are back up and consumer debt is on the rise. Sharply, too. At first glance you'll think, this isn't the biggest problem because the consumer debts are just going back to pre-pandemic levels. However, there's a big difference between 2019 and 2022. Interest rates.
At the end of 2019, the bank's prime rate was at 3.95%. Today, they sit at 4.70%. If the Bank of Canada increases rates again, this prime rate will go up to a minimum of 5.20%. This is a big difference from 2019. This is why I'm starting to worry.
How can you take advantage of this information?
If you're looking to purchase a home, remember now that you have the leverage. With supply going to outweigh demand very soon, current homeowners might become desperate.
Pay down any debts that you can. Start with the smallest balances first. On all of your debts, be sure to make at least the minimum payment to keep your credit score up.
If you're looking to consolidate any debts, now's the time. You'll be able to get a better interest rate now than in the short-term future and your home value still might be intact. Home values are dropping, rapidly. The longer you wait, the less opportunity you'll have to consolidate.
Remember this when borrowing money, "Money often costs too much".
Questions/Comments?
Give us a shout in the comment section or find our contact details on the main page of our website at www.triedandtruemortgages.ca
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