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Interest rates have changed – has your financial plan?

For much of the last 20 years, we’ve been living in a world of relatively low-interest rates.

In early 2022, when interest rates were at an all-time low, the Bank of Canada started to raise them. And 10 rate rises later, Canada’s key interest rate has moved from 0.25% up to 5%—a big change in a short period of time!

Generally speaking, the central bank cuts rates when it wants to stimulate borrowing, spending, and investment (as it did in the early days of the pandemic), and raises rates when it wants to slow down an overheated economy (as it has been doing lately to stave off inflation and try to avoid a recession).

When interest rates are higher, the cost of borrowing goes up and this can affect the way you approach financial planning. Understanding how to adapt to higher interest rates can help you maintain and grow your wealth. Here are some things to consider around financial planning in a higher interest rate environment.

Prioritize debt repayment.

From car loans to credit cards to mortgages, most of us carry some type of debt. And until 2022, debt was relatively affordable with lower interest rates. Now that the interest rates are higher, it’s a good time to look at any outstanding debt you’re carrying and evaluate which debt makes sense to pay off first – as certain monthly payments may or may not have changed.

For example, if you have a fixed-rate car loan, your payments will remain the same; but if you have a home equity line of credit (HELOC), chances are your payments have likely risen along with interest rates as interest rates for HELOCs are usually variable and thus affected by the Bank of Canada’s key interest rate. If you’re in this situation, perhaps it’s time to speak with an advisor about consolidating debt or refinancing your mortgage.

The same goes for mortgages. If you have a variable-rate mortgage, your payments may have increased, but if you have a fixed-rate mortgage, payments will remain the same for the term of the loan. If your mortgage renewal date is approaching, you may want to speak with a Mortgage Agent Level 1 so you have an idea of how your payments will be affected since you’ll be renewing in a higher-rate environment.

“Reducing your outstanding debt not only lightens your financial burden but it also saves you money in interest payments over time,” says Chris Knoch, Mortgage Agent Level 1.

Evaluate your budget.

Interest rates have risen in large part to fight off inflation which peaked at 8.1% in June of 2022, and has since declined – the rate of inflation was 4% as of August 2023. When inflation is high, many expenses increase as we’ve all likely witnessed when looking at the price of things from new and used vehicles to everyday purchases at the grocery store. Add that to the fact that higher interest rates also increase borrowing costs, and you can see why many Canadians are revisiting their budgets to see where they can reduce costs.

Reducing expenses can help free up funds that you can use to pay off debt or to invest. Review your monthly spending and identify areas where you may be able to reduce your expenses such as cutting back on non-essentials like entertainment and dining out or reducing unnecessary digital subscriptions. You may also want to consider consolidating debt to reduce interest charges, postponing major purchases, or even renegotiating premiums on things like insurance policies or mobile phone plans.

And even if you don’t need to cut back, there’s always value in having a detailed look at your spending habits. You might be surprised at how much you spend on certain items, and that may encourage you to shift your spending priorities.

Take advantage of high-interest rate opportunities.

There are some silver linings when it comes to higher interest rates especially when it comes to low-risk, fixed-income investments. Investment options such as a high-interest savings account (HISA) or a guaranteed investment certificate (GIC) were largely ignored when interest rates were at an all-time low, but now they are looking more attractive as they provide better returns when rates are higher.

In fact, at the time of writing, Educators Financial Group’s 1-year GIC had a rate of 5.68%*. GICs also come with many other benefits including:

  • Principal protection – your initial investment, or principal amount, and your interest payments are guaranteed.
  • Fixed interest rates – GICs offer fixed interest rates for a specified term, so you know exactly how much interest you’ll earn.
  • Flexible interest payment frequency – you choose whether to receive interest payments monthly, semi-monthly, or annually.
  • Eligible for registered accounts – GICs can be held within registered accounts such as RRSPs or TFSAs to give you an added tax advantage.
  • Deposit Insurance – The Canada Deposit Insurance Corporation (CDIC) covers GICs with terms of 5 years or less.

*Rates are subject to change without notice, some conditions apply. Speak to a financial specialist for full details.

Review your current investments.

Fixed-income investments are part of a balanced and diversified investment portfolio so while interest rates are higher, it might be a good time to review the asset allocation in your portfolio and see if adding funds to a HISA or GIC is the right choice for you. This can also be a great option for anyone who has been holding cash in lower-interest savings accounts.

“Because returns are predictable with HISAs and GICs, they are attractive options for investors with low-risk tolerance” adds Educators Certified Financial Planner Lisa Raponi.

Of course, your optimal financial plan and investment strategy will depend on your specific goals, risk tolerance, and timing. So the best approach to financial planning during a higher interest rate environment is to speak with one of our financial advisors to get professional advice on how to best reach your unique goals.

Want more information on financial planning? We can help with that.

Since 1975, Educators Financial Group has been helping members of the education community plan for the future they want. We can do the same for you. We understand your pay grid, pension, and the unique financial challenges you face.

Book a complimentary consultation with one of our financial advisors who will work closely with you to understand your financial picture and give you educator-specific advice to create the right plan for your goals.

Brokerage license 12185. O.A.C.

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