How sustained high interest rates may be affecting you

Starting in March 2022, the Bank of Canada began increasing its benchmark interest rate to help control inflation. In a series of 10 increases, the rate went from 0.25% to 5.00%. That’s a significant move in about a year and a half—and it’s affecting people differently depending on how they borrow and how they invest.

Impact on borrowers

Interest rates on lines of credit (including home equity lines of credit) and some mortgages are “variable,” which means they rise with the Bank of Canada’s rate. People with variable-rate debt immediately experience the impact of higher rates.

The minimum interest-only payment on lines of credit suddenly goes up, straining household budgets. Variable-rate mortgage payments may also increase—and, even if a mortgage is structured so the payment amount stays the same, more goes towards interest and less goes towards paying down the principal. This means it may take longer to be mortgage-free.

Borrowers who have loans or mortgages with fixed interest rates can breathe a sigh of relief—for now.  Their interest rate will not change during the term of their debt. However, when it’s time to renew, they may face a jump in the payment amount and/or have to negotiate for a longer loan term or mortgage amortization.

Impact on investors

Higher interest rates are a good thing for investors who are in the market for a GIC, perhaps because an existing GIC is maturing and up for renewal. GICs have been paying very little for many years, so some conservative investors are happy to be able to access better returns on their savings.

What’s important, however, is the real rate of return (the return after taking inflation into account). Unfortunately, inflation remains well above the Bank of Canada’s 2% target, at 4% in August 2023. If inflation stays in that range for the next year, a one-year GIC paying 5% will only net investors a real return of 1%.

The challenge is that investors who would prefer a bigger increase in purchasing power from their investments face interest rate headwinds. Stock markets typically decline as internet rates rise and cool the economy. Bonds also tend to drop in value when interest rates go up. That said, a period of higher interest rates can present attractive buying opportunities in both stocks and bonds.

What can you do?

To weather higher interest rates:

• Borrowers can develop a plan to accelerate repayment of credit card balances, loans, lines of credit and mortgages, prioritizing debt with the highest interest rates
• Investors can consider investments that benefit from higher rates, such as GICs, alongside other assets that provide better long-term growth potential

Your advisor can help you develop and implement a customized strategy that positions you for current and future interest rate environments.