Time to Get Used to Higher Rates

It’s easy to get caught up in jargon when you work in finance. There is no shortage of acronyms (RRSP, CPI, HISA…) and there are a lot of terms thrown around (bullish, bearish, doveish, hawkish). This article introduced a new one to me: “the five year, five year forward”. No wonder people stop listening. The terms that are most important are the ones that affect you and your household.
When it comes to interest rates, I hear the pain in clients voices every. single. day. Younger people who bought homes at variable rates believing that this is the path to paying as little interest as possible are being strangled by higher mortgage payments. Older clients who did renovations using a Home Equity Line of Credit (HELOC-there we go again with the acrnomys!) expecting to be able to afford the interest payments on a fixed income are in the same boat. We fantasize about the era of lower interest rates even though what we are experiencing now is much closer to the long-term norm. My professional college (FP Canada) publishes standardized rates of return to be used in financial forecasting for precisely this reason – prevailing rates of inflation, interest and market performance are fluid. 12 months ago, we were criticized for using a short-term cash rate (the rate of interest on money market funds and the like) of 2.3% because it was considered way too high! And in forecasting mortgage renewals, we were using interest rates of 4.3% – 5% which was similarly criticized. Whatever pressure you are facing on your loans, don’t romanticize what was; work with the information that is front of you now and re-evaluate your strategy at regular intervals.

Read the full article on The Wall Street Journal

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