Every increase in the Bank of Canada’s benchmark rate brings sunshine into the life of the aspiring first-time home buyer.
Not so much for young owners. They’re getting snowed under by rising mortgage costs. But if you have hopes of some day owning, or if you’re keen to set yourself up for never owning, then the rising rate trend is your best friend.
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The direct benefit of rising rates is higher returns on risk-free savings and investments that can help you reach financial goals like building a home down payment or an investment portfolio. Indirectly, rising rates depress house prices. What a switch from a year ago, when interest rates on savings earned you close to nothing and house prices surged by double-digit amounts.
The first step for exploiting rising rates is to keep all your savings in a high-rate account at an alternative bank rather than one of the big banks. Expect rates of 2.5 per cent to 3.5 per cent in an account with no fees and mobile apps that make it simple to shuttle cash between savings and a chequing account elsewhere.
Savings account rates are influenced to some extent by the Bank of Canada’s overnight rate, so keep an eye out for rate hikes in the next week or two.
With inflation at 6.9 per cent, you lose purchasing power on money earning 2.5 per cent or a bit more. But your money is 100 per cent safe if you stay within deposit insurance guidelines, and easily accessible with no fees in most cases. With prices for stocks, bonds and houses falling this year, there is value in having liquid, risk-free money.
The term “savings” refers to money you might need in five years or less, or that you need to keep risk-free for an extended period of time. Your Plan B fund for emergencies such as job loss, car trouble, pet illness and such should be in a high interest savings account, and so should your home down payment fund if you want the flexibility to buy any time it suits you.
Never – repeat, never – trust your home down payment to stocks and bonds. The amount you could lose is bigger than the potential upside compared with a savings account. So far in 2022, a balanced portfolio with 60 per cent of assets in stocks and 40 per cent in bonds could easily be down 15 per cent.
To get maximum value from rising rates as a saver, consider guaranteed investment certificates. GICs aren’t easily redeemable unless you buy a cashable version paying lower interest. But if you can afford to lock money down for a period of one through five years, the reward is an interest rate that can be as high as 4.5 to 5.2 per cent.
You could try matching GIC terms with your financial plans – a three-year GIC to further your goal to buy a house in three or more years. But given how quickly plans can change when you’re young, one-year terms are best.
GIC rates are more connected to what’s happening in the bond market than the Bank of Canada’s overnight rate. But rates in the bond market have been rising lately and GIC returns have started to edge higher. As of early this week, the online bank Tangerine was offering a comparatively high 4.85 per cent on its one-year GIC.
Tangerine also offered a market-leading 5.2 per cent for five years. Give GICs some thought for longer-term investing as opposed to saving. In a diversified investment portfolio that has at least five to 10 years to run, GICs could substitute for some or all your bond holdings.
Tax-free savings accounts are an ideal place for GICs, and even for savings accounts as well. Interest you accrue outside of a TFSA or other registered investment is taxed like regular income, which means that even people of modest income will lose a chunk of savings to tax. The TFSA contribution limit for 2022 is $6,000, with an increase to $6,500 widely expected.
Much of what you read about the latest Bank of Canada rate increase will quite rightly be about the burden on people with mortgages and other debts. But if you’re hoping to get into the housing market, there’s reason for hope.
One year ago, a good rate on savings was 1.25 per cent and average national resale house prices were headed to a jump of 18.2 per cent compared with October, 2020. Now you can get 2.5 to 3 per cent or more on savings and the national average resale house price is down about 22 per cent from the peak this past February.
Mortgages are still getting more expensive, so we’re not gaining ground on affordability yet. To prepare for lower prices and better affordability, save up.
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