Posted by Tim Stobbs on April 14, 2010
I’ve got to be a very small minority in Canada right now: I actually want interest rates to start to rise. Yes I’m ready for those higher interest rates that every economist in the country is predicting over the next few years (I have noticed a wild differences on the details of when and how much).
Well how bad is the rate speculation right now? Well I haven’t been keeping score but I’ve seen predictions from a 1.5% increase by 2011 up to a 5% increase for that same time frame. To be honest I don’t think anyone can really know. Raising rates is a reactionary event to the data available at that time, so predicting the when/how much is sort of like gambling.
Unlike a lot of people a rise in rate won’t be a negative for me. I have no balances on my line of credit or credit card. I just signed a five year fixed rate mortgage just last year so I’m not worried about the short term rate increases. Also I’m well on my way of paying off the mortgage before my current term ends so I don’t really worry about how high or fast rates go up in the medium term.
On the other hand I will have a large free cash flow that I can start investing into GIC’s as rates come up and I pay off the mortgage. One little game I will have to watch out for is if the rates come up fast and high I might want to invest in GIC’s more than my mortgage is the rate spread gets too big (ie: I’m getting paid significantly more for a GIC over a mortgage payment). Obviously if I play that game I’ll have to still make sure I pay off the mortgage by the end of my current fixed rate term to avoid getting burned with higher rates myself.
So what if you aren’t ready yet for the higher rates? Here are a few ideas on what to do.
- Pay off variable rate debt. Lines of credit, margin accounts…just about anything linked to the prime rate should be paid off if you can in a short time frame (less than a year). If you can’t pay it off in the short run, look at your highest variable rate debt and go after that one first.
- Consider locking in your mortgage rate. I used the word ‘consider’ for a reason. This is worth a look, but not everyone should do it. For example, if you have a dirt cheap variable rate and can handle the higher payments you might want to take the risk of rising rates in order to pay off more of your principle in the mean time. I personally didn’t want to play that game so I went to a lock in rate last year. It was a personal choice for me.
- Have some savings. To avoid adding new variable rate debts make sure you have some savings on hand for those little accidents in life. Also you will want to get in the habit of delayed gratification and saving for something before you buy it.
If any of the above suggestions sound familiar they likely are because just about every personal finance blog you have ever read says these same things. It’s just a bit more important now that you start listening when the negative consequences of too much debt is about to get a bit more painful in the next few years.
So are you ready for higher interest rates? Is so, why? If not, why not?