๐Ÿ›  Interest rate toolkit

Published On: October 28th, 2022

Interest rates are UP, UP, and UP, both in Canada and the United States. We’ll look at who’s most affected by this rate hike, how much more you’ll pay on your mortgage, plus a mini-toolkit to help.

๐Ÿšจ The Bank of Canada raised rates 50 basis points to 3.75%, a 15-fold increase in just eight months.

๐Ÿšจ Americans are feeling it too โ€“ mortgage rates have more than doubled since the beginning of the year, and The Federal Reserve could hike more.

๐Ÿ‡จ๐Ÿ‡ฆ ๐Ÿ‡บ๐Ÿ‡ธ I’ve some Canadian-specific content today, but haven’t forgotten my American readers. Follow the flags for news you can use!

Today’s newsletter is 843 words, 4:15 minutes.

1 big thing: ๐Ÿ‡จ๐Ÿ‡ฆ Ouch

Canadian households are feeling the pain as we head into our sixth consecutive rate increase since March.

What changes: Let’s look at where rising interest rates are felt the most.

Variable Rate Mortgages: Depending on province and mortgage size, expect yet another jump in payments. Letโ€™s assume a 25-year amortization with a 4.30% variable rate that got bumped to 4.80%.

  • ๐Ÿšจ On a $340,000 mortgage, the monthly payment increases from $1,844 to $1,941 โ€“ $95 more.
  • Factoring in all the rate increases of this year, mortgage payments jump by over $600. PER MONTH.
  • Thatโ€™s over $7,200 more per year.

Fixed-Rate Mortgages: Brace for renewal shock if you’re at the end of a fixed term. Stick with the same lender and you won’t need to pass the Mortgage Stress Test. If shopping around for another lender, be prepared to stress-test 2% higher than your rate to qualify.

HELOCs: As rates go up, monthly interest payments head north too. HELOCs are often persistent debt where homeowners pay just the monthly interest and not the principal. Keeping up with larger HELOC payments plus a growing mortgage is a pressure no one wants.

๐ŸŽ“ Canada Student Loans: Students still get a break since interest was suspended until March 31, 2023.

๐Ÿš— Car Loans: These tend to be fixed-rate loans, so you wonโ€™t see an increase unless you refinance or purchase a new vehicle.

๐Ÿ’ณ Credit Cards: Credit cards in Canada most often have a fixed rate, so a hike has little effect. But with rates hovering around 19.99% it’s impossible to rejoice.

๐Ÿฆ Savers Market: Rates for savings accounts tend to lag far behind, especially at the big banks. Credit Unions and online alternative banks are boasting more competitive saving rates. At the time of writing I’m seeing 2.85% for HISAs and returns of 5% on 5-year GICs.

2. ๐Ÿ›  Mini Toolkit for the times

๐Ÿ‡จ๐Ÿ‡ฆ ๐Ÿ‡บ๐Ÿ‡ธ Many of us have already cut spending โ€“ even on essentials like food โ€“ because rents, monthly mortgage payments, and credit card debt have soared. Here are some resources to help:

Cash Flow Checkup: Add up your debt payments, utility bills, rent or mortgage, HELOC, child care, gas, car payments, food food food, and all of the things. Does your income cover it? Check for hidden recurring costs (like subscriptions) and cut. My free Budget Bundle can help.

  • ๐Ÿ‡จ๐Ÿ‡ฆ TFSA: It may be time to tap your emergency fund or your Tax-Free Savings Account (TFSA) if cash-flow is a concern. See TFSA withdrawl rules.

Human behavior is complicated, and our emotions can be our greatest friend or foe. My free audio course How to afford the life you want walks you through financial habits, behaviors, and missteps that cost you.

Asking for help is OK: If struggling to keep up with debt, don’t wait until it’s too painful. Consider visiting a licensed insolvency trustee (LIT) โ€“ they work on your behalf and offer many options, like consumer proposals. A financial planner who charges an hourly or flat rate can help too.

3. ๐ŸŒŽ Around the world

๐Ÿ‡บ๐Ÿ‡ธ U.S. mortgage interest rates jump to 7.16% (Reuters)

๐Ÿ‡บ๐Ÿ‡ธ Fed to hike by 75 bps again on Nov. 2 (Reuters)

๐ŸŒŽ Recession or Inflation? Governments must pick their poison (NPR)

4. ๐Ÿฉบ Net worth isn’t self worth

๐Ÿ‡จ๐Ÿ‡ฆ ๐Ÿ‡บ๐Ÿ‡ธ Time for a little self care.

Owe vs Own: Net worth is whatโ€™s left after subtracting the amount you owe from the value of what you own. Net worth can be a volatile force, moving up and down and taking emotions along for the ride. Your self worth is priceless, please don’t tie it to whatever the market is doing. If you got my last newsletter, you heard from behavioral economist Dan Ariely on the most important investment today.

Hint: it’s you.

5. ๐ŸŽ™ All of the media

I did a whole lotta media this week. I was on a few call-in shows and talked about all things rate hikes. Two are now online.

 

Love love love,

Kerry

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