There are 2 groups of consumers who will be most concerned with increasing rates: Investors/Savers and borrowers. The first wants rates to increase, the latter does not.
Investors/Savers have had a tough go of it over the past 3 years. Mutual Funds and stocks lost as much as 30% of their value in 2008, and then the rates at the banks and credit union all dropped along with the Bank of Canada rate. Stock prices have mostly returned, but that means investing in non-guaranteed funds, while the guaranteed investments have only made 2% to 4%. This group will be quite happy to see rates rise so that they can get a better return on their guaranteed investments and savings accounts.
Borrowers will not be happy as rates rise. This will impact mortgage rates, with an immediate impact on variable mortgages. It will also hit lines of credit, authorized overdraft rates, variable rate personal loans, and new or renewing mortgages. Rates have been extraordinarily low over the past 3 years, but people have gotten used to them being this low. Hopefully most people take advantage of the low rates and pay off as much debt as possible before the interest cost of their loans increase.
If you have locked in to a 5 year mortgage at today's low rate, be aware that at your renewal time in 3 to 5 years, your payments may increase by a fair bit, depending on how high and how fast rates rise. Currently most banks think the bank prime will rise from today's 3% to about 5% by the end of 2012. This could mean your 5 year rate increases from 4.2% to about 6% upon renewal. That's increase of over 40%, which means your payment may increase by that amount as well. Can you afford it? Just keep that in mind if you are looking to buy a house, as that will hit your wallet when the time comes.
So, the forecast is, rates will rise. They will probably increase at a slow, steady pace over the next 2 years, unless inflation comes on strong. Most consumers will be impacted, but if they plan well the rates can work for them (investing instead of borrowing). Jerry
Jerry,there is no direction for rates to go but up. It is a pretty easy forecast, but you are absolutely right about the impacts. Borrowers have gotten used to low rates, when having them twice is high would be more normal. There are going to be a lot of people hit by rising rates that will have to learn how to budget for the first time in their lives, and while that may be difficult it isn't necessarily a bad thing.
ReplyDeleteAs for savers, I have been hoping for higher rates for a long time.