Are you sensitive?
To rising interest rates?
The Bank of Canada rate went up Wednesday from 0.50% to 0.75%.
OMG!!! That’s a 50% increase!
Well technically yes, but in reality no.
The rate is essentially a basis for the banks to raise their rates by the same 0.25%. So if your current Line of Credit or variable rate mortgage is at 2.75% it may soon be going to 3.0%. That’s still a 7.5% increase in interest payments and may have a painful on cash flow, if you’re currently very tight. On a loan balance of $300,000 it means an additional $62.50 in interest charges per month.
More importantly, it’s an indicator of interest rates rising from the bottom (0.50% in Canada since 2015) and following the US Federal Reserve lead of last year.
Have you done a stress test?
Are you heavily leveraged because debt has been so cheap? It’s easy to justify new investments if your ROI only has to beat a borrowing cost of 2.75%. At the more normal rates of 5% - 6%, there is less margin for under-performance on assets.
Try calculating the impact of higher rates on your cash flow. It may be time to de-leverage and start building cash reserves.
The Bank of Canada is trying to reduce the risk of high inflation by slowing growth in the economy. You are expected to take the hint. And if the interest rate is not enough to convince you, you will notice that higher rates also mean a higher value Canadian dollar, so exports will now be more difficult. Your import and foreign exchange costs will go down. (There had to be some good news in all of this.)
Be aware of what it all means to you and your business. It is not yet urgent, but it is important. Take a closer look and start cautious application of surplus cash to reducing debt. Be more selective on new investments and in commitments to any new recurring expenses.
Be better. Do better.
Your Uncle Ralph, Del Chatterson
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