The Bank of Canada has given the country a grace period to prepare for rising interest rates. Use it wisely.
It’s now expected the central bank will start raising rates in early March or in April. This leaves ample time to figure out how vulnerable you are to higher rates on your mortgage and other debts. Your investments may also need some attention, including stocks, bonds and guaranteed investment certificates.
Here are five things to focus on in the weeks ahead so you’re prepared for the rate hikes to come:
Nail a great mortgage rate while you can
The spring pickup in the housing market is still off in the distance, but it’s not too soon for home buyers to lock in a mortgage rate with a bank or mortgage broker. It’s standard for lenders to offer 90- or 120-day rate holds, which means you’d have until the end of May at the latest to close a deal.
Also, get yourself prequalified for a mortgage. This will give you confidence your lender will actually approve your application for a mortgage at your locked-in rate.
Jump on your next mortgage renewal
Mortgage renewals in recent decades have mostly offered pleasant surprises in the form of lower rates, or at least the status quo. With rates rising, you need to be more pro-active with renewals. Waiting until close to the renewal date can subject you to a rate hike you might have avoided with earlier action.
Lenders typically let you renew a mortgage 120 days ahead of maturity without penalties, but some may offer a 180-day window. If the renewal rate you’re offered looks uncompetitive, push back and see what competitors will offer.
If you worry about the cost of your variable-rate mortgage getting out of hand as rates rise, find out what rate you could get if you locked into a fixed-term mortgage. Locking into a fixed rate may not save you money – it depends on how much the Bank of Canada raises rates during your mortgage term. But a fixed rate does save you from stressing your way through all the rate-setting announcements to come in the next year or two.
Reacquaint yourself with your loans – students, especially
Loans taken out years ago may suddenly cost you more every month. Now’s the time to find out what you’re up against.
Let’s use student loans as an example of the two types of loans – those with a fixed rate and those with a rate that floats along a commonly used benchmark called the prime rate, which refers to the ultimate low rate for a bank’s best clients.
Under the Canada Student Loans program, there are fixed-rate loans set at prime plus two percentage points and floating-rate loans set at prime, which is now 2.45 per cent. If the Bank of Canada raises rates in March or April by the expected 0.25 of a point, bank prime rates will rise to 2.7 per cent.
If you have a fixed rate on a loan, rate hikes to come are a non-event. With a floating-rate loan, you’ll pay more. Figure out how much more so you’re not surprised by bigger-than-expected loan payments after March.
Apply tourniquets as needed in your investment portfolio
The new rising rate paradigm is already hurting the price of bonds and conservative dividend-paying stocks such as utilities. Year-to-date, the Canadian bond market is down 3 per cent, while utilities stocks as a sector are down around 3.6 per cent.
Short-term bonds, maturing in five years or less, will decline less when rates are on the rise. Expect corporate bonds to be a little more resilient than government bonds.
If you hold conservative dividend stocks for income first and foremost, then price fluctuations caused by rising rates mean little. Maybe buy more on any price dips if you’re a long-term investor.
Be a GIC ninja
That is, be ready to strike if you see an attractive rate. Rate competition between issuers of GICs has picked up lately, partly because of the rising rate outlook and partly because they’re battling each other to raise money that can be lent out to customers at higher rates.
A five-year Government of Canada bond has a yield of 1.7 per cent or so these days, but Canadian Imperial Bank of Commerce has had a promotion on for a five-year GIC at 3 per cent, which is a premium rate right now. CIBC offered 3.25 per cent earlier this year – that’s why you need to jump on deals when you see them.
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