How long can interest rates stay so low?

I hate to sound like everyone else – it often pays to be different, but we must recognize  most economists and experts are forecasting interest rate increases beginning as early as this Summer.

The Bank of Canada rate was 4.25% in January 2008, and now it is only 0.25%, and has been there for almost a year. This has resulted in the lowest consumer borrowing (and saving) rates ever!

The Central Bank sets its interest rates to keep inflation at around 2%. But the Canadian economy grew at an annual rate of 5% in the last three months of 2009 – a very healthy growth rate – but this is bringing inflation fears into the picture. If inflation sets in, interest rates can only go up.

Historically, economists are never that reliable in predicting where interest rates will be in the future – but they do usually get the direction correct! Most see increases of one to one and half percent by the end of the year. Next year and the year after, who knows?

What does all this mean for us?

If you have invested money in savings accounts and GIC’s, now may not be a good time to lock in for five years (which is traditionally the term offering the highest interest rates.) Keep your holding periods short, in the hope that higher rates are around the corner. The major banks are quoting five year rates at only 2%, and a “high interest” savings account might only be yielding 0.75% right now.

If you have a car loan

Your rate is most likely fixed, so none of this should concern you much.

If you are using your personal or business lines of credit

You can expect to see your minimum monthly payments increase at the same time as interest rates are rising.

If you are buying a home now, or your current mortgage is coming up for renewal,

If you qualify for the best interest rates, that means a five year fixed rate mortgage would be around 3.69%, but a variable rate mortgage might be as low as 1.95%.

Many homebuyers are very attracted to the 1.95% rate and make their buying decisions today based on this low rate with its very low monthly payment.

For my money, I want to sleep at night and not worry about this stuff. I like five years at 3.69% -it’s amazing! But that’s me – I am a bit conservative.

If you already have a mortgage

You may not be able to do anything yet, since penalties to break existing mortgages can be very high. You should ask your mortgage specialist what your penalty would be, and then decide.

Some people have variable rate mortgages from a few years ago, where their rate today is as low as 1.15% . They will be reluctant to do anything different unless they really feel pressure – I don’t blame them.

But remember, the key word is “variable”. It can go up or down. Hard to go lower than 1.95% or even 1.15%, but if rates start going up and up, variable mortgage rates could become very uncomfortable one day.

It’s an individual decision, and depends on many things. Talk to your mortgage specialist if you want an informed second opinion.