You now have roughly six to nine months to get a personal
plan together for dealing with higher interest rates.
After that, the ride begins. Where it ends depends on how
smartly the economy and inflation snap back, but we could be looking at a prime
rate of more than double the current 2.25 per cent by the end of 2011. Let's
look at how you can prepare:
1. Home buyers, lock down your mortgages
If you absolutely must buy a house in the overheated market
in some big cities, then consider insulating yourself against rising rates by
taking a five-year fixed-rate mortgage. A quick scan of mortgage brokerage
websites shows five-year terms priced in the range of 3.69 to 3.99 per cent,
while the big banks are advertising specials as low as 4.19 per cent.
Forget the research that shows you'll save on interest over
the long term if you go with a variable-rate mortgage. If you're stretching for
family cash flow to buy a house, then cost certainty is more important than
potential savings.
Investor Education:
* Should I buy a
home now, or wait and save more money?
* Understanding
house prices
* Is it better to
buy a home, or choose some other investment? Charlie's story
* What makes
buying a home different from other investments?
* What are some
renovations that add value to my home?
Anyway, today's five-year rates are quite good by historical
standards. Bank of Canada data show the average five-year rate over the past
decade was 6.8 per cent, which compares with a typical posted rate today of 5.5
per cent at many banks (this rate is bogus - always ask about the kind of
discounted rates mentioned just above).
Note that seven- and 10-year mortgages are available today
for rates as low as 5.2 to 5.3 per cent.
2. Homeowners, face the music
If your mortgage comes up for renewal in the next few years,
brace yourself for higher rates and, thus, potentially higher mortgage
payments. Suggestion: ask your lender for your projected mortgage balance at maturity
and then use an online mortgage calculator to figure out how much your payments
would be at various interest rate levels.
One suggestion for accommodating higher mortgage payments is
to reduce your overall monthly debt carrying costs by paying down your line of
credit.
Emergency measure: lengthen the amortization period on your
mortgage on renewal. This is costly in terms of extra interest, but it will
take the pressure off in terms of your payments.
Longer amortization periods are only a remedy for people who
went with the standard 25-year payback period when they arranged their
mortgages. People who started with a 30- or 35-year amortization have already
played that card.
