We’ve gone from some of the lowest interest rates ever to the highest rates in decades in the past 15 months. Last week’s rate increase by the Bank of Canada has brought us to a point where borrowing costs are quoted as high as 7 and 8 per cent. If you’re a Gen Xer, a millennial or part of Gen Z, you may never have seen the likes. Here’s the story of today’s high rates told in four snapshots. For reference, the Bank of Canada’s trendsetting overnight rate is now at 4.75 per cent.
Home equity lines of credit: 7.45 per cent
A typical rate on a HELOCs is your bank’s prime lending rate, reserved for the most creditworthy clients, plus a markup of 0.5 of a percentage point. Banks increased their prime rates last week by the same amount as the Bank of Canada raised its overnight rate, which means we now have prime rates at 6.95 per cent and HELOCs with rates of 7.45 per cent.
Two years ago, the cost of carrying a HELOC balance would have been 2.95 per cent. Just prior to the pandemic, about 4.45 per cent. Today’s HELOC rate requires a minimum monthly payment of $310.42 on a $50,000 balance outstanding, and that just covers interest. You’d have to pay more to chip away at the principal.
In the low-rate years, HELOCs were considered a cheap source of money for emergencies and for investing. The chances today of consistently earning a return that cleanly beats the cost of interest on a HELOC are minimal.
Leasing a 2023 Toyota Prius Hybrid: 8.29 per cent
Add zero per cent financing for vehicles to the list of great values of the past. If you haven’t checked out new vehicles lately, prepare to be shocked at the costs. Not just the vehicle price – the cost of leasing and financing has soared as well.
Toyota Canada’s website shows a financing rate of 7.19 per cent on the good-looking 2023 Prius, and 8.29 per cent on leases. The biweekly payments on a loan over 72 months work out to $600.63, if you put $10,000 down.
High vehicle financing costs reflect not only high interest rates, but also demand for certain vehicles. You can get better rates on vehicles people don’t want.
One-year fixed rate mortgages: 6 to 7 per cent
There’s some appeal to the idea of a one-year fixed-rate mortgages today in that they give you an opportunity to benefit if rates are lower in 12 months. Even after the Bank of Canada raised rates last week, this is still possible.
Unfortunately, the cost of putting yourself in a position to renegotiate your mortgage rate in a year is high. Posted one-year rates at big banks were as high as 7 per cent early this week, and mortgage brokers offered discounted rates around 6.2 per cent. The one-year fixed rate mortgage is the most expensive option right now for financing a home. Locking in for five years cost about 5 per cent as of early this week with a good discount.
Longer-term mortgage rates usually cost more than short-term rates – you pay extra for the security of having a set rate for a period of years. Today, short rates are higher because inflation remains a near-term problem. There’s less worry about long-term inflation, which is why a five-year mortgage costs less. The net result of this rate environment is that people must lock into a term of three to five years to save significant money versus a one-year term.
A variable-rate mortgage costs about 6.05 per cent these days, and there’s a risk of having to pay even more if the Bank of Canada raises rates again in July or later this year.
Big bank savings account rates: 0.01 to 1.8 per cent
These rates are shocking for both their low level and the contrast between them and the cost of borrowing money. Banks try to divert attention from their low rates on savings with temporary rate promotions, tiered rates that favour big deposits and offers that require you to make regular deposits. The bottom line is that savings rates at banks are typically no more than 1.8 per cent, which compares to as much as 3 to 4.1 from alternative banks.
The best way to immediately benefit from rising rates as a saver or investor is to use high interest savings account mutual funds and exchange-traded funds. Rates for these products are in the 4.05 to 5 per cent range.
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Rob Carrick