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A spring project for your personal finances: Get ready for lower interest rates this summer.

The latest numbers show inflation slowly retreating toward the threshold preferred by the Bank of Canada. More of the same in the next couple of months would likely convince the central bank to start unwinding the hefty rate increase of the past two years. Big bank economics teams currently think rate cuts could start as soon as June or July.

Inflation suddenly re-emerged a year ago after seeming defeated, so the outlook for rates is still fluid. But it does look right now like we’re coming to an inflection point for the economy, where the narrative shifts from high rates to rate cuts.

Here are five thoughts on how to prepare for the shift:

If you’re shopping for a home, check the mortgage rate hold from your lender

Anyone planning to buy a home should have a commitment from a lender to hold a mortgage rate for up to 120 days. If borrowing costs fall, it’s on you to go back to your lender to lock in a lower mortgage rate. Don’t expect this to happen automatically.

For now, remind yourself what rate your lender has already committed offered and check periodically to see how it compares to the latest rates. Mortgage rates could come down a bit in anticipation of what seems to be a slam-dunk rate cut by the Bank of Canada later in the year. Note that getting a new rate hold may require another credit check. Frequent credit checks can lower your credit score.

Buy one-year GICs

You can still get 5 per cent on one-year guaranteed investment certificates from a wide variety of alternative banks, and some big banks may get that high with their special offers. Stocks are doing well these days, so better returns for the next 12 months might be available. Or, not.

What a 5-per-cent GIC gives you is a certain outcome, and a return that is close to double the latest inflation rate of 2.8 per cent. In a tax-free savings account, you deke around the tax problem of GIC investing in non-registered accounts. Interest from GICs is taxed as regular income, whereas dividends and capital gains get more favourable treatment.

Rates for longer-term GICs have mostly slipped below 5 per cent, but 4.5 to 4.75 per cent is still available for five years. Also, ask for an interest-rate bump if you have a relationship with your bank. Readers say they’d had some success in getting posted rates topped up at least a little.

Buy bonds or bond funds

A rate cut by the Bank of Canada would send a strong signal to the bond market that interest rates are finally heading lower. We could see a big run for bond prices if rates keep falling, which means strong returns for bonds and exchange-traded or mutual funds that hold them. The bond market had a good year in 2023, but it’s been squishy so far this year because of rate uncertainties. There’s a rally coming at some point.

Invest in dividend stocks

Falling rates should make dividend stocks more attractive, which means potential for share price gains. A lot of dividend stocks have already risen in price, but there are exceptions in sectors such as pipelines, telecoms, utilities and even one of the big banks, Bank of Nova Scotia BNS-T.

Buying dividend stocks now gives you an opportunity to lock in yields that will look increasingly good as rates for bonds and GICs decline. Be cautious with stocks that have an exceptionally high yield – that’s a sign of investor concern about the company and its ability to sustain its dividend payout. Stumped on what to buy? Try a diversified Canadian dividend ETF.

Take stock of your non-mortgage borrowing costs

Each rate cut by the Bank of Canada should flow through to lines of credit, which is great news for borrowers. But even home equity lines of credit, generally the cheapest way to borrow, are expensive right now at 7.2 to 7.7 per cent. Rate cuts will lighten the interest burden on lines of credit, but not dramatically in the near term. For that reason, consider paying down some or all your credit line balance now. Maybe use your tax refund.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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