Best. Interest. Rates. Ever.
That's what the Bank of Canada has given to borrowers. Oh, maybe rates were lower at some point in our distant past, but people back then were amateurs at spending money. Today, we have mega-low rates and a consumer society that pops out a new thing to buy every 20 seconds.
So let's take a (tongue-in-cheek) look at the rationale for borrowing today.
First off, it has to be said that it's good business to borrow now. If your household were a well-run corporation, your chief financial officer would be arguing strongly for using low-cost debt to pay for major capital expenditures.
You can now finance the cost of a house at just below 4 per cent for 10 years. Great deal. Five-year mortgages come as low as 2.99 per cent. Unbelievable. Expect to pay 3.5 per cent if you set up a home equity line of credit, which is the Gumby of loans. So flexible – you can just pay interest every month if you want and you can delay full repayment indefinitely. Best. Interest. Rates. Ever.
The Bank of Canada, master of the economy, actually wants you to borrow. That's why the central bank's benchmark lending rate has been at today's low level since September, 2010. The global economic system hasn't been its old self for years now and low rates are the standard tool for turning things around.
Maybe you've heard those warnings from Bank of Canada Governor Mark Carney that today's debts could become unmanageable when interest rates rise. It's true that interest rates are miles – sorry, kilometres – below their historical averages. The central bank's benchmark rate could quadruple and still be in line with what we saw in 2006 through early 2008. Old timers in the mortgage business say it wasn't that long ago that paying 5 per cent for five years was considered a great deal.
That's fine, but we've been warned about rate increases since back in 2009 and we're no closer to them now than we were back then. Brace yourself for higher rates? That's like worrying about bad traffic on Yonge Street when the Toronto Maple Leafs win the Stanley Cup. Manana, baby.
Borrowing money is almost your patriotic duty. Be proud you can help spend the country out of danger. The Americans and Greeks tried it, but we're actually doing it. Borrow today and keep our home builders building so they can contribute to the economy. Keep the car dealers dealing. If we stop buying, we stop growing as a country.
Sure, savers are a bit testy about the low rates that are so great for borrowers. You can't blame them when it's a home run to get a 2-per-cent rate of return from a high-rate savings account, and 3.5 per cent from a five-year guaranteed investment certificate. But what did a high savings rate ever do for a country beyond encouraging fusty old habits like balancing your household budget and living within your means?
Think also of the personal gratification you get from borrowing. Salaries have been going nowhere for a few years now on average, so it's not like you've got a surplus of cash to replace that outmoded big-screen TV, or upgrade to a better SUV or house. Speaking of houses, isn't it time to move up? Get that man cave you deserve, and the designer kitchen. If moving isn't on, then renovate. Granite beats laminate any day.
Let's not pretend there's no downside to borrowing. It leaves you less money to save, and that can have an impact on your retirement income.
Also, unemployment is a more dire risk when you're heavily indebted. But think of the free time you'll have to enjoy all your stuff.
The best news for borrowers is how depressing the global economic outlook is. Europe may be sliding into a recession, and that's going to choke back growth here and internationally. The Bank of Canada says our economy did better than expected at the end of 2011, and now it's likely going to slow down.
Something to look forward to: A worse-than-expected economic performance that forces the central bank to cut interest rates. We may just see better rates than the best interest rates ever. Keep your fingers crossed.
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Rob Carrick