With all the news about rates on the rise you may be wondering: “What does it really mean to me and my pocket book?”
Rates rise to control spending in the economy. When the Bank of Canada has data indicating that inflation is rising too quickly it works to simmer down the rise by making borrowing (the fuel of spending) more expensive. They do that by raising their overnight lending rate. This makes it more expensive for everyone who is borrowing and has any sort of revolving credit or floating rate of interest.
So, what does that looks like for you ?
Variable rate starts moving up. For a 0.25% increase in your rate you can expect to cost you $10.76 extra per month for every $100,000 on the average 25 year amortized mortgage.
On your home equity line of credit or other simple interest credit lines you will find your payment will increase by another $20.84 for every $100,000 balance. That may not seem like a lot, but once you add it up it means more of your cash flow is going toward debt and not toward other goals you may have. Also, you should consider your effective rate on your debts.
If you have $250,000 variable rate mortgage at 3.3%, $100,000 home equity line of credit at 4.2%, and a $25,000 personal line of credit at 8%, and Visa of $10,000 at 18.5%, your effect interest rate for all of these debts is actually 5.59%. If your balances are going down slower than the increase to the rates then you will be effectively paying more over time for your debts. That really means that you are not moving ahead financially like you once were.
Being aware of this is important because if you have multiple types of debts at varying rates you may be unknowingly giving away more of your income to interest charges. As the era of precedent setting low rates is effectively now over, you need to really examine your portfolio of debt and equity and ask yourself “With my equity, can I create more cash-flow and get better returns on my debts?”
Yes! Your debts have a return. Every dollar saved on interest is a dollar earned. GUARANTEED!
Managing your debts and equity side of your balance sheet is more important than ever. It is often not spoken about with your Financial Advisor, because it not a very attractive topic as compared to what stock or fund to get into these days. We may see another rate increase tomorrow, and surely more in the future. If you would like to review your Debts and Equity side of your balance sheet, please let me know.