Tag Archives: interest rates

Half of us fear rising interest rates will be negative for our finances

Posted By |

Now that interest rates have finally appeared to bottom, consumers are starting to worry about the prospect of rising rates and their impact on their personal finances.

This is explored in my latest article, which is in Monday’s Financial Post (e-paper and online). You can access it by clicking on this self-explanatory highlighted headline: Only a quarter of Canadians have a  rainy day fund, but more than half worry about rising rates.

It describes a new Forum Research Inc. poll that shows more than half of Canadians (51%) fear rising rates will negatively impact their personal finances. The national poll of 1,350 voting-age adults was conducted after the Bank of Canada raised the prime interest rate from 0.75 to 1% on September 6th, which in turn followed an initial 0.25% hike in July.

After an amazing run of nine years of ultra-low interest rates, it’s clear consumers are starting to fret the party is over. Anyone with variable-rate mortgages might well be petrified that interest rates could again reach the high teens, as they did in the early 1980s. Little wonder that many homeowners are starting to “lock in” to fixed mortgages while rates are still relatively low.

Of course, as Credit Canada’s Laurie Campbell notes, for the longest time it’s paid to stay variable and flexible, whether with a variable-rate mortgage or a line of credit. It does cost a bit more to “lock in” to fixed mortgages, as Campbell notes, but the ability to sleep well at night in my opinion more than makes up for the difference.

While the poll asked specifically how consumers felt about the second hike, “they are worried more are coming,” Forum Research president Lorne Bozinoff told me. 12% say the negative effect will be extreme. However, 17% believe rate hikes will have some positive aspects:  you’d expect debt-free seniors to welcome higher returns on GICs and fixed-income investments. Another 38% don’t think it will have an effect either way.

Lorne Bozinoff

A quarter have no emergency savings at all

Bozinoff is more concerned that 26% of respondents have no emergency savings, and 40% have a cushion of a month or less: 9% have less than a month and 11% just a one-month cushion.

Financial planners generally recommend three to six months as a hedge against job loss or other setbacks. A minority do: 14% have two to three months, 9% four to five months, and 13% six months to a year. Only 15% have a year or more and predictably, 56% of the latter group are 55 or older. Continue Reading…

What rising interest rates mean for the stock market, and how to cope

Posted By |

By Matthew Wilson

Special to the Financial Independence Hub

We’ve all seen the headlines: “Interest rates are on the rise.” The United States has raised rates three times since December and the Bank of Canada is now on the move after seven years of silence. Here’s what you need to know and how to prepare:

How high will rates go?

Before we start worrying about how this impacts our investments, let’s first look at how high we can expect them to go.

To do this we simply need to open the history books and look at (on average) how many times the Bank of Canada has raised interest rates when entering an increasing rate cycle. They never simply raise rates once and be done with it; they typically raise in a continuous cycle over the course of several years. Here’s what I mean:

  • 1999–2000: 4 rate hikes
  • 2002–2003: 5 rate hikes
  • 2004–2007: 10 rate hikes
  • 2010: 3 rate hikes

So, on average, whenever the Bank of Canada starts a cycle of raising interest rates we can expect to see approximately 5–6 increases.

It’s safe to say we won’t get back to the days of 16% interest rates as seen in the early 90’s, but we can expect to get back to the 3%–6% range that we saw throughout the early 2000’s.

Between 1990 and 2017 Canadian interest rates have averaged 5.92%, so as we currently sit at 0.75% we have quite a way to go. Here’s what I mean. Please refer to the graph that’s at the top of this blog.  As you can see we are just starting to come off the bottom: early days!

When do higher rates start to impact investments?

Just because interest rates are moving higher doesn’t necessarily mean bad news for the stock market, at least not yet.

Take the US for example. In their last four rate increase cycles they raised interest rates 10 times (on average) during each cycle. The US stock market (S&P 500) moved up an average of 23% during each of these cycles.

So, it’s not all doom and gloom, but there is a point at which we need to start getting concerned.

This tipping point typically comes once we get into the 4%–5% range. Why?Because as we near the end of a rising interest rate cycle it can start to slow down the economy in a number of different ways:

Firstly, it means higher borrowing costs for corporations and consumers, (i.e. higher mortgage rates, auto loan rates, lines of credit, etc). For corporations, this means less profit because they are spending more money on interest.

Secondly, it means more competition between bonds and equities. Right now you can get stock dividends paying a nice 4%–5%, but as bonds get up into this same range we start to see an outflow of cash from the equity markets and into the bond markets – seeing as bonds are incredibly less volatile, and if they are paying the same yield, people will naturally go with the less risky investment.

Essentially, bonds start competing with the equity markets, and with so many baby boomers retiring on fixed incomes they can’t afford the volatile swings of the stock market so they switch to bonds.

How long until we need to start worrying?

As mentioned above, markets don’t typically start to feel the impact of rising interest rates until we reach the 4%–5% range.

Continue Reading…

September could be busy for fixed-income investors

Posted By |
UST/CAD 10-Year Spread

 By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

With the calendar turning to September on Friday, we’re all sitting back and lamenting the end of another summer. Well, for fixed-income investors, any possible summer doldrums could quickly change, as a number of potentially headline-making events are looming directly ahead, specifically on the central bank front. While the markets do not appear to be anticipating any surprises, the next few weeks look to be busy.

For the G5 developed market world, the Bank of Canada (BOC) is set to kick things off next week with its formal policy meeting, slated for September 6. After hiking the overnight lending rate by 25 basis points (bps) in July (the first rate hike since 2010), expectations as of this writing are not looking for a follow-up move.

Bank of Canada unlikely to move on Sept. 6

Indeed, the implied probability for a rate hike next week is at only 21.7%. It is interesting to note that an integral reason behind the July increase was the BOC’s belief that it needs to focus on future price pressures and not be complacent even though inflation readings, up to that time, had been on the soft side. Thus, when the July year-over-year inflation gauge jumped .2 percentage points to +1.2%, the policymakers may have felt some vindication. Looking ahead into the fourth quarter, the probability of a rate hike for the October policy meeting jumps to 69%.

The European Central Bank meets the following day, September 7, while the Bank of England and Bank of Japan are on the docket for September 14 and 21, respectively. That leaves the Federal Reserve (Fed) on September 20. As of this writing, market expectations not only don’t see the Fed raising rates at its next meeting, but the outlook is for no hikes at all for the rest of 2017. Continue Reading…

Sharing mortgages with unequal incomes

Posted By |

By Alyssa Furtado, RateHub.ca  

Special to the Financial Independence Hub

When you decide to buy a home with another person, there’s a good chance there will be a difference in your incomes. Whether the difference is big or small, it raises questions about how expenses will be split up. Two people with unequal incomes getting a mortgage together is a very common occurrence: couples make up a vast majority of homebuyers. But you can also buy a home with a friend or family member.

If you’re planning on sharing a mortgage with someone else, here’s what you need to know to make it work.

How will the home be owned?

If you’re purchasing a home together, you need to discuss how the ownership will be structured. If you’re a married or common-law couple, you’ll probably opt for what lawyers call joint tenancy. Both parties share a 100% stake in the property and both are fully responsible for everything related to the home, including the mortgage, taxes, and maintenance. If one partner dies, the other becomes the sole owner of the home.

If you’re buying with a friend or family member, you might opt for what lawyers call tenancy in common. With this structure, each person owns a separate share in the property and is responsible for their share. If you’re planning on being tenants in common, and one of you earns a higher income, you’ll need to discuss how that affects each partner’s ownership stake in the home and who will be responsible for what payments.

Who pays for what, and why?

When making decisions about how to share expenses, couples in joint tenancy usually take on equal responsibility. Since both partners are 100% owners of the home, finances are joined and mortgage payments are made using a joint account. Household income is the only thing that matters in this situation. Couples have to work together to make decisions about their budget to ensure the mortgage, property tax, and maintenance costs are all paid.

For tenants in common, you can choose to split up ownership and expenses a few different ways:

Continue Reading…

Avoid the Credit Card minimum payment trap

Posted By |

Somewhere on your credit card statement there is a note saying if you only make the minimum monthly payment each month, it will take you a certain number of years and months to pay off the balance – BUT ONLY IF YOU NEVER ADD ANY MORE CHARGES TO THAT CARD AGAIN!

Your credit card agreement will specify the minimum payment that is due every month. This amount is generally a certain percentage of the balance owed. This percentage can often be based on factors such as your credit score and the limit on your card.

Basing it on a percentage instead of a fixed amount (like a consumer loan, for example) works in the credit-card company’s favour because the minimum monthly payment reduces as your balance reduces. It will take decades to get out of debt and cost you hundreds, if not thousands, of dollars in interest.

At one time, minimum payments were 5% of your balance, but they have gradually reduced to an average of 2%. My personal Capital One MasterCard requires only 1.45%.

According to a recent TransUnion survey of Canadian credit-card holders, 44% of respondents pay their credit card balance in full each month, and 9% just pay the minimum. Interestingly, it varies by province, with consumers from Ontario (27%) and British Columbia (20%) most likely to pay the minimum.

Avoid this financial trap

Jacob moved into his first apartment. His first stop was the local furniture store to buy some living room furniture. He put $5,000 on his new credit card (18.9% interest). The first minimum payment was $200 (4%). If he maintains this payment, it will take him 11 years and 5 months to pay the entire balance and, by the time he has made his final payment he will have paid $8,109 for his furniture. That’s a lot of money for something that will drop in value year by year, assuming he will still own it in 11 years. Continue Reading…