Will Interest Rates Rise & How Protect Yourself
If you’re like many Canadians you hold either a mortgage, credit card, or student loan, some may hold all three, but a interest rates rise affects your bottom line whatever the case and always, what comes out of your bank account on a monthly basis.
Interest rates affect the percentage you pay your lender for lending you the money you need for either a home, consumer products, or an education – it’s the interest you pay on your loan.
So the fluctuation in the interest rate is a big deal, it can truly be the difference of thousands of dollars over the course of the loan’s term, meaning your monthly payments could potentially increase with the up and downs of interest rates and the market.
If you’ve ever been out hunting for a mortgage you’ve, without doubt, experienced the interest rates discussion.
If you’ve done it the smart way you’ve checked out at least two different banks to find a competitive rate, if you’ve done it the smarter way you’ve gone with a mortgage broker who can look at alternative lenders to help find you the best mortgage rates possible.
How do Interest Rates Rise in Canada?
Will interest rates rise in Canada in 2017? That’s a pretty hard question to answer and many economist disagree when drawing their own conclusions. The way interests rates rise and fall have to do with some pretty high level economic theory and how world markets react.
We won’t be getting too deep into that side of things but if we take a rather simple approach to the way interest rates rise in Canada there’s a few things to consider:
- Interest rates can change at any time, sometimes the even fluctuate more than once a day. Variable rates fluctuate even more frequently and can often change hourly.
- The Bank of Canada’s key interest rate is the interest rate at which financial institutes borrow money at amongst themselves. While the key interest rate doesn’t directly consumer interest rates there is a trickle down effect that can take anywhere between 12 – 18 months to effect the mortgage and loan side of things. There are 8 fixed dates on which the Bank of Canada announce whether or not it will change its key interest rate.
- Generally, the Federal Government tries to protect consumers in so that the population doesn’t take on more debt than it can afford. It does this by setting interest rates as mentioned above and assigning new mortgage and lending policies to help curb over extending debt.
A poor economy can be good for interest rates. Low oil prices and a declining dollar help to bring interest rates down. Fixed rate mortgages are tied directly to government bond yields, which right now are at an all time low.
Interest rates have been arguably declining in Canada as the Loonie struggles to stay above $0.70 of an American dollar and oil prices continue to bobble around the $30/barrel mark. Canada’s economy is in an interesting time and in a bit of downward motion, which often – but not always – makes for lower interest rates in the country.
However, if interest rates in Canada do begin to rise it’s best to know how to protect yourself against the end of the month shock when you mortgage payment is due.
How to Protect Yourself Against a Interest Rate Rise
No one wants to wake up in the morning and find out that the interest on their mortgage have spiked by a couple of points. It makes for larger monthly payments that you might be able to afford and thousands of dollars throughout the term of your loan. There are a few different ways you can go about protecting yourself when it comes to interest rates rising. Here are a few to consider:
- First off, there a few things to consider when deciding what type of mortgage you’re looking for. Fixed rate and variable rate mortgages are both a little bit different in their structure and cater to different types of people. Briefly, with a fixed rate mortgage you can lock into a particular interest rate for a fixed term, usually 5 years, and you’re stuck with that interest rate until it’s time to negotiate. With a variable rate mortgage, your monthly mortgage payments are at the mercy of the bubbling economy, sometimes they’re up and sometimes they’re down.
- Mortgage brokers are in an interesting position. Unlike banks, brokers are able to source lenders from a variety of sources. Where as a bank only has the interest rates available to them, Mortgage brokers can do a whole lot more for you. Looking at alternative lenders, Mortgage brokers help you find the lenders that will beat the banks on not just interest rates, but also penalties when you need to break your mortgage early.
It’s hard to predict whether interest rates will go up in 2016 or if they’ll fall. Even economist have a hard time agree or not if the interest rates will rise in the coming year.
Many suggest locking into a fixed rate mortgage as rates are generally below the 3% mark – so however suggest that a now is a great time to stick with a variable rate mortgage as the opportunity to save a some money on interest is rather appealing. In either case, it’s only a matter of time until the pendulum starts to swing back.