…what does this mean for me?
In recent financial news – something rather surprising happened this January. Last month, the Bank of Canada decided to lower interest rates. This was the complete opposite of what had been anticipated by many Canadians, with many believing the rate would rise this year – financial experts included. The interest rate was cut by 0.25 of a percent – and reasons surrounding this action has been attributed to issues such as the all time low oil prices – and an overall concern for the strength of the current economy.
While this move has in fact driven down the costs of loan borrowing on the whole, on the other hand it has also narrowed down the yield margin between long and short term rates. With that being said, it may not make a large difference early on for some borrowers, however over time this could change.
If you are like me, you are probably wondering what does this interest rate cut mean for me? With a diverse range of loans and current credit balances, it will be helpful to be aware of how this rate may affect you as a consumer in Canada. Here are some areas where current interest rates may impact the current and future nature of your finances.
1) Less Expensive Mortgages (for some)
For those of you that have variable-rate mortgages, this interest cut is definitely a positive occurrence. Since this type of rate is tied to the prime interest rate, then mortgage borrowers will see their rates and overall mortgage payments go down right away. For those with current fixed rate mortgages, they are not likely to see an immediate change since the rate will remain stable. Yet, maintaining a lower rate can still be a financially sound loan. If new borrowers or refinancing borrowers look to new mortgage terms, then they may also be able to secure a favourable rate.
2) Line of Credit & Credit Cards
If you are a line of credit or credit card borrower, again variable rates aligned with prime interest rates will be affected. Line of credit borrowers will typically experience lower costs, almost overnight – depending on the level your bank will cut down its prime rate.
Alternatively, credit card interest rates will not be quite as forgiving. Credit card rates are fixed or stated amounts that continue on, unless otherwise stated in the loan agreement. If borrowers are able to switch to another credit card with a lower rate, then this may still be the best method of helping to lower their costs – however don’t expect your card or cards rates to budge.
3) The Dollar Value
Following the Bank of Canada announcement, the loonie took a tumble in relationship to many other leading currencies. This of course translates into less purchasing power over the boarder and internationally. Speculations about the dollar have stated that the value will remain low for sometime, and this will impact international travellers, U.S. home owners, and so on for the foreseeable future. Sticking close to home for your purchases and travel may be the best option for the time being.
4) Auto Loans
If you have a car loan you may also not experience much of a change in payments. Auto loans also tend to carry fixed rates and as a result the rate drop is not to have an rapid influence on vehicle financing. On a positive note, lower car loans could be in the cards down the road, as car dealers try to outdo their competitors by securing lower rates for their customers.
5) The Downside of Saving
For savers, a difference in how much they can save may also occur. With lower interest rates, savings accounts may not accumulate as much interest earnings as they would have before. While savers may not observe a large deficit in interest returns, it will impact them none-the-less.
As you can see the lower rates will not necessarily mean that all things will be rosy for borrowers across the board. While it will bring about some positive aspects for many, for others there will be some potential downsides.
Overall, many experts in the financial field may see this interest rate cut as a sign that Canadians should still remain cautious about borrowing. Since this decrease is linked to a shaky economy, then borrowing too much could lead to further debt. Another point associated with this argument reflects the fact that interest rates will increase . . . eventually and with a lot of debt on our plates, when do rates go up, we may find it difficult to manage our finances.
On the other side of this discussion is the fact that if you do require a loan, then this may be an ideal time to take advantage of the lower rate. With that being said, again the word caution comes to mind as overspending and over-borrowing often fall into the same category where debt is concerned.
If you do want to try and get rid of some of your debt – now may be the time while lower rates still exist. If your plan is to commit to getting rid of your debt, whenever interest rates go up or you need to borrower some more money, you will be in a much better position to handle these financial responsibilities.
