The pandemic has driven interest rates to historic lows as central banks try to support and stimulate the economy. Do you know how these low rates are affecting your finances?
Given the uncertainty as pandemic conditions evolve, many central banks have signalled the intent to keep rates low for at least another year or two. Some are even considering (or have implemented) a negative interest rate policy whereby short-term rates dip below zero. Institutions needing to park their cash will not only forgo earning any interest, but they must actually pay for parking their money. The intent of negative interest rates is to motivate institutions to keep money flowing through the economy by lending it out, instead of parking it at a negative rate.
Interest rates typically move higher when the economy is growing at too strong of a pace and inflationary pressures build. Higher rates discourage rampant spending as the cost of borrowing rises. Conversely, lower rates help promote consumer and business spending because borrowing becomes more affordable.
Low rates: Are they good or bad?
Depending on your financial circumstances, today’s lower interest rates may impact your short-term and long-term financial goals in either a positive or negative manner.
In general, low interest rates are good for borrowers, such as people who hold a mortgage or car loan, or have drawn on their line of credit. Low rates also benefit business owners who may already have (or may need) a loan to expand their business, cover inventory purchases or pay for renovations and other large expenses.
On the other hand, low rates are typically unfavourable for people who receive interest income from products like GICs, money market mutual funds and high-interest bank accounts. Savers will need to revisit their financial plans to ensure they are still generating enough income to satisfy their short-term needs and address their long-term wealth objectives. This is especially true of people like seniors who are often surviving on a fixed budget and rely on interest income to make ends meet.
Tips for managing a low-rate environment
- Don’t be tempted to overspend just because interest rates are low and the cost of carrying debt is less demanding. Some examples of unnecessary spending include buying a bigger or nicer house than you need, taking on an excessive mortgage burden, putting too much debt on your credit card, tapping into (or increasing) a line of credit without a legitimate need, and making impulsive large purchases like a new car or the latest technology (expensive phone, laptop, gaming equipment, etc.), when what you presently own will suffice.
- Let’s go through your financial plan and current investment portfolio to ensure you have an appropriate mix of interest-bearing investments – such as GICs and bonds – and growth-oriented investments like stocks and mutual funds, to accommodate your unique financial situation and goals within this low-rate environment.
- If you have a low-interest-rate mortgage, instead of reducing your debt faster through extra payments or increasing the amount of your regular mortgage payments, think about being more aggressive paying down higher-rate debt in order to lower your interest costs.
- For example, if you have a high-interest credit card balance, let’s explore ways we can pay off (or at least pay down) this debt through a loan or home equity line of credit, which are now attainable at attractive rates. We can also consider consolidating your debt to pay it off in a more cost-effective manner.
Contact our office if you’d like to discuss ways you can best manage your financial circumstances in this extended period of ultra-low interest rates.