home ownership For nearly an entire decade we've been told to watch out for rising interest rates. And they're here ...

Over the past few years, it seems every expert has told us interest rates would rise. Now, now after years of record-low rates, the Bank of Canada (BoC) has started to raise them, citing “bolstered” confidence — the Canadian economy has emerged from years of slow growth.

On Wednesday, the Bank of Canada raised its prime lending rate an additional .25 per cent to 1.25 per cent.

Here are the three ways the rising interest rates will affect you:

1. Household costs

Prime rates affect the cost of borrowing on floating-rate loans, including variable-rate mortgages, credit lines and student loans. This means that variable interest rates on consumer loans will go up immediately, which will increase overall household costs.

2. Qualifying for a mortgage

It’s expected the BoC will continue to raise the prime rate incrementally over the next year, which will further increase overall costs. This may make it even more difficult for consumers to qualify for a mortgage.

3. Economy's overall activity

If rates continue to rise, as expected, it’s possible we may see impacts on the housing market. Fewer people will be able to qualify for mortgages, thereby taking a number of people out of the market. There are many aspects of overall economic activity that are highly dependent on a robust housing sector.

Not all bad news

I believe the government is hoping that house prices will moderate, but that’s risky at best. I certainly hope the interest rate increases, along with the recent changes to the mortgage rules, won't dampen the economy. The government walks a fine line. We will just have to wait and see.

This is an opportunity for mortgage holders to consult with their mortgage professional to review their options, especially if you are in a variable rate mortgage. So, here we are at a crossroads. Do you lock into a fixed-rate or do you stay the course? The answer is — it depends. The solutions are as individual as the mortgage holder.

Many home buyers choose a fixed-rate because they know exactly how much principal and interest they pay on each regular mortgage payment throughout the term.

Then there is the issue of eroding affordability, namely for first-time home buyers. Again, have a discussion with a mortgage professional who can guide first-timers through the process and help them develop a plan.

Be prepared

At the moment, it appears rising interest rates are here to stay. So, it might be prudent to prepare for rate increases this year.  Here are some suggestions:

  • You may want to lock in your mortgage. When prime rates start to rise, variable-rate mortgage holders may be vulnerable. This is a personal decision, based on your risk tolerance. At a minimum, consult your mortgage broker to find out what works best for you.
  • Take advantage of your mortgage pre-payment options to increase your principal which will give you even more flexibility at renewal time.
  • Don’t simply accept the first renewal offer presented by your bank. Make sure to speak with a mortgage professional to compare options, not just when you purchase but at each renewal as well.

We have been in an historically-low interest rate environment for nine years now. While rates may stay low, it looks as if we are going to see some continued movement higher.

Personal Finance