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What to do now that you know rates will stay on hold

Wrong, wrong and wrong.

Can I be any clearer about all the forecasts you read not too many months ago about rising interest rates?

Bank of Canada governor Mark Carney indicated Wednesday that rates will stay right where they are for quite a while as a result of global economic uncertainty. That means it's time to strategize about your borrowing and investing. Here are six things to think about:

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1.) The big reprieve: Canadians owe too much – that's a fact, Jack. Now, the Bank of Canada has indefinitely postponed the reckoning that will come when interest rates march higher. You can handle your debts now, but what happens when rates returns to levels that are closer to historical averages? Make it a priority to owe less when rates rise.

2.) Variable-rate mortgages look good: The major banks' prime rate is now 3 per cent – apply a discount ranging from 0.45 to 0.70 of a percentage point and you get much cheaper interest costs than you would with a fully discounted five-year fixed rate of 3.45 per cent. Sure, the prime rate will rise once the central bank starts to move again on rates. But in the meantime, you'll be saving bigtime.

3.) Unending hell for savers: Rates on high interest savings accounts and money market funds are stuck in low gear. It's a complete drag, but you have to live with it. Do not take on more risk to get higher returns on money you cannot afford to lose.

4.) Unending hell for conservative investors: Rates on guaranteed investment certificates and bonds are not directly affected by what the Bank of Canada does. But the central bank's concern about the global economy signals a broader trend of low interest rates that will flow into bonds and GICs. Dividends paid by blue chip stocks are an alternative, but only if you can live with shares that fluctuate in price even as they reliably churn out quarterly cash. In non-registered accounts, those dividends will be taxed much more favourably than interest, by the way.

5.) Lines of credit look good for smart borrowers: If you must borrow, a home-equity line of credit remains the best way. Expect to pay prime plus as much as half to a full percentage point. Mind the danger with credit lines, though. They are not a supplement to your paycheque to help you afford fun stuff. They're for strategic borrowing to bridge a short period between the time you buy something and the time you can afford to pay it off in full.

6.) Credit cards are a borrowing disaster: Card rates are unaffected by what the Bank of Canada does, so don't waste your energy getting angry about 19 per cent rates on unpaid balances. Get a credit line or a consumer loan and pay off your credit card balance as soon as possible.



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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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