Last week the Bank of Canada raised their overnight interest rate to 1.75%, an increase of .25%. Several of the big banks immediately followed suit. Borrowing costs will likely increase, for example on variable rate mortgages and lines of credit.
What prompted me to write this blog post were the headlines that implied ‘the sky is falling!’ like Chicken Little said.
FYI: There are 2 sides to every story. Most of you reading this are not old enough to remember Canada Savings Bonds paying 9.75% interest for a year, at the same time that mortgage rates were double digits. In the 1980s a decent savings return was the norm, and at the same time borrowing costs were high. Back then pension plans and insurance companies found it much easier to meet their obligations to their plan holders because getting a good savings return was achievable with little effort. Still no one including the Bank of Canada wants to go back to that era. The Bank of Canada is striving for balance.
Fast forward to the present. In some jurisdictions in the recent past savers were paying a bank to deposit their money because interest rates were negative. A mortgage rate south of 5% is still a good deal. The ultra cheap rates of the past few years were ABNORMAL and more importantly UNSUSTAINABLE and quite possibly encouraged imprudent borrowing. If you want to help a friend or yourself, remember to calculate that housing costs should not be more than 40% of your monthly income. Currently the debt to income ratio for Canadians is for every $1 of income $1.69 is owed in debt.(Statistics Canada)
The Bank of Canada is looking to the future. It needs a tool to be able to wisely handle the next recession. The tool they will use will be to lower interest rates. And it knows that Canadians who are borrowers will fare better in the next recession if rates rise gradually. As I have said before, they are taking the punch bowl away and saying party’s over. Catch a cab and go home.
More careful lending and borrowing is needed. Financial planning involves reviewing all aspects of your financial situation including your borrowing and repayment habits. Our meetings will involve a game plan that included the ‘what ifs’ so you can take any financial event in stride.