Jul 5, 2017
Pattie Lovett-Reid: How much will a rate increase cost you?
Now that we are at the halfway point for the year and on the cusp on a Bank of Canada interest rate announcement, it just might be the ideal time for a mid-year performance update. No point in waiting until the end of the year when you are likely feeling time crunched and that it is too late to change up a losing strategy.
There are enough data points suggesting if you haven’t, now is the time to take a look at your personal balance sheet. I’m talking about your income statement and your net worth statement. A Bank of Canada rate hike on July 12 is a real possibility, the TSX so far this year is down – close to two per cent – and for many comfortable with their variable rate mortgages, locking into a fixed-term rate is a worthy consideration.
Based on the average Canadian home priced at $750,000 (with a minimum down payment of 10 per cent amortized over 25 years) and a five-year variable rate of 1.75 per cent, the total monthly mortgage payment would be $2,864, according to RateHub. With a 0.25 per cent rate increase, that monthly mortgage payment would be $2,947, an increase of $83 per month or $996 per year.
To be honest, I don’t try to time the market, but I do believe in staying on top of the market. To me it just makes financial sense.
Here are a few things to think about from a quantitative and qualitative perspective:
1. Do you have any major lifestyle considerations such as a change in careers, marriage, birth of child or retirement?
2. Given the performance of the markets, is your asset allocation out of balance? Staying aligned to your asset allocation is what makes diversification work.
3. If rates go higher, how will that impact your disposable income? Consider locking into a fixed-mortgage term to reduce some of the volatility on your balance sheet.
4. Do you know what it is you are spending your money on? Most of us know exactly how much money we have coming in, but the same can’t always be said when it comes to spending.
5. Most have filed their taxes, and using last year’s tax return, now is the time to make adjustments to reduce the amount you might owe or the refund you receive next year. Better you have use of your money than the government.
6. It wouldn’t hurt to review your insurance protection and your retirement planning.
You can’t control all that is going on from an interest rate perspective or market perspective, but a review of where you stand helps you control how you respond.
