How Much and When?

How Much and When?

Written by: Cory Regier

Hey Cory – What are rates doing?

It’s a question I often hear from friends, relatives, and clients.  Everyone wants to know whether now is the right time to lock in their mortgage and/or their GICs or if they should wait for higher or lower rates that are coming.    Unfortunately, I don’t always know the answer as it often seems when I’m convinced that I know what is going to happen, something unexpected changes.  Interest rates move based on various economic and geopolitical factors and those factors are always changing.  Then there are wild cards like a global pandemic that come out of nowhere and suddenly change everything, including interest rates.

So, having given that warning at the outset, there is a general consensus in the financial markets that interest rates will decrease in the year ahead, but the key question remains – How much and when?  Opinions by much smarter people than me are quite varied at this point, from expectations that continuing inflationary pressure will keep rates high for some time to predictions that recessionary forces will bring a need for rate decreases that come as fast and furious as the increases came in in 2021.  Time will tell which prediction comes true.

What then is a person to do?

Get good advice.

For borrowers, that likely means talking to your lender about your ability to absorb interest rate increases.  If your debt service ratio (the portion of your monthly income that goes to cover debt payments) is high, you have little ability to absorb the cashflow impact of higher interest rates.  While expectations are for rates to fall, there is no guarantee that they won’t actually continue to rise first, and, if that happens, borrowers with a floating rate may find themselves unable to make their payments.  Currently, many institutions are posting long-term rates that are lower than short-term rates, which is an excellent opportunity for borrowers to ensure that their payments won’t rise for a significant period of time. The very fact that the rate curve is inverted (long-term rates are lower than short-term rates) hints at the possibility of being able to renew at lower rates in days ahead, but once again, it depends on how much and when rates move.

For investors, consider hedging your risks by spreading your fixed term investments out over time, a strategy commonly referred to as laddering your portfolio, to ensure that you’re never in a situation where you’re having to invest all your money at a point in time when rates are at a low-point.  In a normal rate environment, longer term GICs earn a higher rate than short-term options so when each “rung” of the ladder comes up for maturity, it can be renewed for 5 years, usually earning the best rate possible.  Since we’re not currently in a “normal” interest rate environment there is a temptation for investors to abandon their ladder and simply take the best rate possible, and whether that works out to their advantage depends again on how much and when rates move in the days ahead.

For those clients who have both loans and investments, it gets even more complex, but a strategy worth considering would be to try and match the term of interest rates on both sides of the balance sheet.  If your loans and investments mature at the same time,

  • Higher rates will mean higher cost of borrowing, but also higher investment returns,
  • Lower rates will mean reduced investment income but also reduced payment obligations on loans.

Institutions like Amity Trust do this to protect against interest rate risk and clients can sometimes apply the same strategy with their assets and liabilities, although most clients will want to work with an advisor on a strategy like this.

Interest rate decisions are complex.  Our investment and lending staff would be happy to talk with any clients about the right plan for your individual situation. 

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