Renting vs. Buying, and other things to consider in the rising interest rate environment
Recently, the central bank of Canada (aptly named the “Bank of Canada”) once again increased the prime interest rate. In total, this marks the third increase of interest rates in the last year. “But how does a rising increase rate affect me?” you might ask. It’s quite a complicated question, and to answer it properly, we’ll need to look at the many aspects of your finances. One of the many factors, as you may have guessed, is whether you are renting or buying. However, this is just one among many. Today, let’s talk about a few ways that a rising interest rate can affect your finances.
Higher interest rates mean more expensive debt. Ask yourself, what kind of debt do you currently have? A common one might be a mortgage. Many business owners take on business loans. Do you have a car? You might have taken on a car loan in order to finance the vehicle. For many types of debt, the interest rate can be variable. This means that your payments can increase or decrease as the prime rate fluctuates. Contrast this with a fixed interest rate. Fixed interest rates mean that no matter what the change in the prime rate is, your payments do not change.
Take a look through your own finances and think about the different debts that you hold. Which of them have variable interest rates? Generally speaking, credit cards have fixed, although very high interest rates. Business loans will most likely have variable interest rates. Personal lines of credit, like business loans, will also have variable interest rates. Your mortgage has an equal chance of being fixed or variable, that depends on which you chose at the time of signing up. Car loans will generally be fixed as well.
Buying homes now becomes more challenging, although less competitive. With mortgage payments getting higher, it means fewer people will be taking on mortgages. Assuming all other factors remain the same, this may mean a downward trend in housing prices, since there is less competition. If you live in Vancouver or Toronto, however, this probably means nothing.
With a higher interest rate, this means the same amount of mortgage will cost more than before. It is now more expensive to borrow money from the bank. Since banks largely grant mortgages based on income, what this means is that you’ll need to have a higher income in order to qualify for the same mortgage as before.
Rental prices won’t change too much, at least not right away. Due to the way rental agreements are created in Canada, generally speaking, the landlord cannot increase rent on a whim. Rental controls in British Columbia, for example, set maximum rent increases per year, based on inflation. Existing renters, therefore, won’t have to worry too much about rising interest rates, at least when it comes to their housing costs.
It all boils down to having a plan. Whatever your situation may be, and whatever your future goals are, the important thing is to have a plan, which can take into account, or react to any other potential changes in the future. ”failing to plan means planning to fail”. If you can, take a look at your own financial situation and put together a budget which will account for possibly more rises in interest rates in the future. Otherwise, talk to an advisor and they will be able to help you analyze your situation and help you deal with whatever may come in the future!
