Higher Interest Rates – Is it a good thing?

Higher Interest Rates – Is it a good thing?

From time to time, Rob Carrick of the Globe and Mail, posts something interesting and worth while.  We have all witnessed the steady rise of interest rates over the past year.  For those with debt, there are now extra challenges because of increased costs.  For those with savings, there is higher no-risk returns.

I am posting Mr. Carrick’s article below.  It is a pretty good read and I have made some comments at the bottom of the blog.

The emphasis when reporting on high interest rates is usually put on borrowers rather than savers, and that’s a correct approach.

The financial burden of higher mortgage, line of credit and loan payments is felt more deeply than the lift people get when their savings accounts and guaranteed investment certificates pay more. Who among us can absorb hundreds of dollars in extra borrowing costs per month and not have to make painful adjustments?

In a recent Carrick on Money survey, just over 50 per cent of the 2,148 participants described the impact of higher rates as catastrophic, harsh but manageable or mildly negative. Seventeen per cent said high rates had a neutral effect on their finances, while 31 per cent said high rates had either a mildly positive or quite good effect.

Chart, pie chart

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The survey results highlight the two-pronged effect of higher rates. Some people suffer, others see a windfall.

About 22 per cent of survey participants said they were missing out on high rates because they have nothing left to save. Forty-six per cent said they’re able to save at least a little, and 32 per cent said they’re saving lots. Three in 10 said further rate hikes would be a win for them because it would mean higher returns on savings, while 40 per cent said higher rates would be a setback or disaster. The rest said higher rates would have little to no impact.

Comments from survey participants with debts attest to the pain of rising rates for borrowers. Here’s a sample:

  • We have literally nothing left to put food on our plate forget savings or buying even new clothes for our family.
  • My small business loan has gone from 6 per cent to 9.25 pert cent. I am currently seeking out angel lenders who can lend me at 5 per cent so I can save on interest costs.
  • HELOC [home equity line of credit] interest costs are squeezing monthly budget.
  • Feeling the full brunt of increased rates. Any more increases will result in some very difficult decisions. May also need a significant increase in pay to maintain existing lifestyle and debt load.
  • [Use of a] HELOC for a renovation could mean an additional year of work before retiring.

In previous blogs and Facebook posts, we have discussed the merits of being free of consumer debt.  If you are still in debt, consider a “side hustle”  to eliminate the burden.  We cannot predict the future, however, it seems clear that interest rates are going to continue to go up.  For those of you without debt, you are going to be getting a raise that you did not have to work for.

Have a great week!