The Upside of Rising Interest Rates

Hello All,

The current financial environment seems a bit bleak right now. The pandemic, war in Ukraine, housing issues and other factors have led to supply chain disruptions, labour shortages, a plummeting stock market, and inflation. Almost everybody has been directly impacted with one of the most significant consequence being an increase in our expenses and a corresponding decrease in our net worth.

One of the ways in which governments worldwide are dealing with these monetary issues (as mentioned in a previous newsletter) is by raising interest rates. This of course makes our debt more expensive (which is never pleasant) but there are also some upsides. The most direct benefit is that banks/financial institutions are also raising the interest that they pay on savings accounts and longer term investments such as GICs. (Previously, you might have earned enough to buy a cup of coffee on your savings. Now, you might actually be able to buy a few lunches :))

If you have funds sitting in a chequing account or even a savings account, now is a good time to see what interest rates your current bank is offering OR potentially take a look at other banks that often offer higher interest than the big 5 banks. A great resource for comparing interest rates can be found at ratehub (note that this might vary by province). While some of the banks you will see, such as Oaken and EQ bank, may not sound familiar, they are CDIC insured, which means that they offer the same protection on deposits as the bigger banks. You can do your research by checking out which banks are CDIC insured at this link. (You should also look up reviews to see if there are any other red flags.)

For those of you who prefer fixed income investments such as GICs and government bonds (you might find the stock market too risky or you might be a senior who depends on interest income), the rates when you renew your investments should be higher. It can be beneficial to use a “laddered strategy” where you select you GICs with varying maturity dates to take advantage of higher interest rates offered for longer periods but do not fully commit all of your savings. Although, the rates might not fully compensate for increased inflation in the short term, the hope is that things will start to get less expensive soon.

Another upside of higher interest rates is that while mortgages are becoming more expensive, there is a good chance that the prices of real estate will start to come down. Since the cost of buying a home is becoming more expensive due to higher mortgage payments, they become less desirable which in turn reduces demand and prices. This seems to already be happening in the US and to a lesser extent (so far) in Canada.

So, while there are numerous strains on the amount of money we have, it isn’t necessarily all bad news. If you have some savings it is a good time to invest (or reinvest) to take advantage of a more steady source of income.

You can read the full newsletter here