Bring on Higher Interest Rates, I’m Ready!

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.

  1. 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.
  2. 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.
  3. 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?

9 thoughts on “Bring on Higher Interest Rates, I’m Ready!”

  1. It’s hard to imagine the BofC will raise rates too fast considering where the dollar is compared to the US dollar and also the slow recovery currently going on in the US our largest trading partner. But maybe I will be surprised. 1.5% by the end of the year may be realistic.

    My variable mortgage is currently at 1.35% so I will stick with that as my plan is to have it paid off in two years time.

  2. I’m in the same boat as you with planning to eliminate the mortgage before the term is up. With no other debt, I also would be one to welcome higher rates.

    However, it would take a good whale of a interest rate increase to beat prepaying the mortgage. Considering the mortgage is paid in after-tax dollars, I’d have to be getting about 6% return on GIC’s. A five-year GIC is 3% at PC right now.

  3. How funny–I know some people will curse me, but I say bring it on as well.

    We have no debt and we kind of like it when our savings account brings in more than .5% interest–or whatever ridiculous amount it is these days. Plus, we’re getting a little tired of inflation!

    We also want to buy a home and right now low interest rates have caused housing prices to go back up another 3% here in France . . .I realize that the higher rates would affect our ability to borrow, but in France, some banks actually will give you a preferential rate when you’ve saved with them for a certain number of years–like we have.

    Yep, I’m more than ready. (hope it doesn’t cause a financial meltdown. . .)

  4. Yes I’m looking forward to higher intrest rates.

    I’m not a all debt free. In fact I have record fixed rate tax deductable mortgage debt. and a cash horde.

    I’m looking forward to higher intrest rates because I want the realestate market to cool off.

    The yields on rental properties is an insanely low 6% yield.

    we need prime at 5-6% to pop the bubble and improve the yields on rental properties so i can deploy my cash horde

    also if the rates are going up it means inflation is going up.

    maybe your earning more on your GIC’s but what is the real return?

    on the otherhand, debt that finances real assets gets eaten away by inflation.

  5. How old is your 1.35%? Is it from Scotiabank? We have a 1.5% variable from Scotiabank from July 2008.

  6. Ben,

    Good point. The spread has to be compared on a common basis of after tax dollars. I forgot to mention that so thanks for bring it up.

    Tim

  7. I will also welcome interest rate increases. I retired at 45 and live off the interest of my GIC’s and have a small company pension. People forget about the seniors (not referring to myself) who are trying to live off interest from their savings.
    $1,000,000 in savings at 3% is only 30,000. Have the 5 year GIC rate hit even 6% and things get much better for many people.

  8. I think it was RBC that did a report not too long ago about variable rates vs fixed rates. It was something like 85% of people with a variable rate come out ahead over a fixed rate. You’re paying for the comfort of fixed. Of those that were ahead with fixed, it was more to do with luck than anything else.

    Based on today’s rates, the rate needs to go up 2.5% just to equal the 5 year “special” rate. I imagine the increase will be in 0.5% increments, so that means lower payments for awhile. If you pay the same as you would with the fixed rate you’re putting more money towards the principal and less towards interest.

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