Going Up – interest rates that is
Interest rates are going up, and Licensed Insolvency Trustees (soothsayers of doom gloom) have been predicting this for quite some time. The Bank of Canada just increased its overnight rate to .5% – while that doesn’t sound like much it is double the rate of last week, which was .25%.
Now that by no means implies that bank rates will double but they have already started to rise. US economists at J. P. Morgan have predicted the Fed will increase its overnight rate up to nine times in the coming year. The Bank of Canada is usually in tandem with the Fed when it comes to rate increases.
If the Bank of Canada increases rates nine times at .25% each time we would see an overnight rate of 2.5% by next summer. The impact on consumer rates will be significant. We could see consumer mortgage rates back to historic averages of 7-11% – with 11% being the posted rates and 9% being the most common lending rate.
If you are a recent first-time home buyer – drop that paintbrush, stop your renovation plans, and start cleaning the place up instead. Now, I am being very serious! Many first time homebuyers have had to borrow money from secondary sources – such as grandma, the bank of mum and dad, or collapsing RRSPs in order to qualify for a whopping great big mortgage. Paying a line of credit for unnecessary cosmetic work is not smart.
The mortgage may require monthly payments of $2,600 PIT (principal, interest, and taxes) – possibly one partner is covering the mortgage and perhaps the utilities while the other is working to pay for the cars, insurance, groceries, etc. And mum, dad, or grandma, well they are waiting patiently hoping that eventually they will get their retirement money back someday. Now is the time to get out of debt – while you have no equity, at least you may salvage the house.
The average price of a home in London, ON, is $775,000 for $500,000 you may be able to buy a fixer-upper. And you might think that if you put $75,000 into it will significantly increase the value. In a market with rising interest rates, the prices will, most likely, either plateau, go down or collapse. Besides, if you estimated $75,000 you will probably spend $100,000. I know, I have done it!
Assuming you bought your house last summer with a five year flex rate mortgage – you may start seeing increases in your monthly payments sooner rather than later. If you locked in for five years you have four and a half years to go before you will be hit with a rate increase that will likely add $1,000 or more to your monthly payments.
If you are trying to pay down a line of credit, used to do upgrades, you may have a double jeopardy. The payment increase on the mortgage coupled with the payment requirements for the line of credit could leave you in the cold, literally. Beware of total equity plans, where all your borrowing is secured by your house, forego the reduced rate for a back door.
People who go bankrupt can keep their residence if there is little or no equity in it while being discharged from their other debts. However, if all the other debt is secured by the house a bankruptcy will not allow them to maintain the property.
Call us at 519-646-2222 for more information on how to prepare for rates going up and how to protect your assets from seizure. Remember too, if you did use your RRSP for a down-payment on your purchase, bankruptcy will not get you out from under the requirement to repay the RRSP or pay taxes on the amount(s) withdrawn.