Governor of Bank of Canada Mark Carney recently indicated that interest rates would stay on hold due to the global economic uncertainty. This makes many think of the best strategies of investing, borrowing, and repaying, especially now that Canadians have borrowed too much already. For now, Canadians can sigh with relief, and debts are easy to handle. However, it is good to prepare for the time when interest rates will return to levels that are close to what have been the historical averages. Making sure you owe less when interest rates go up is a good strategy for starters.
Lines of credit are now a good opportunity for savvy borrowers. Moreover, the best way to borrow, if you must, is to take a home equity line of credit. Borrowers will pay half to one percentage point plus the prime. At the same time, lines of credit are not intended to be used as to afford fun stuff. Smart borrowers use them to buy something shortly before they can actually afford to pay the money back in full.
While it may be a good time to take a credit line, cardholders may be heading toward a borrowing disaster. The doings of the Bank of Canada do not affect interest rates, with cardholders still paying 20 or so percent on their outstanding balances. When rates stay on hold, smart borrowers obtain a consumer loan or line of credit to cover their credit card balances and not the opposite.
The good news is that Canadians are already dealing with debt more effectively, tackling the debt mountain. Vice President of TransUnion Tom Higgins explains that Canadians take advantage of the current interest rates as to pay back their debts. In fact, the credit balances of Canadians have marked the first decrease after twenty-six quarterly increases. According to TransUnion, Canadians have become smarter when it comes to borrowing. They are charging less to their credit cards, putting more on their lines of credit. Higgins notes that there is a slight improvement, moving at a slow pace, but as long as Canadians are moving in the right direction, this is the best everyone to hope for (the Globe and Mail).
Now, interest rates are on hold, but the government may move into the direction of tightening mortgage rules as to prevent the real estate market from bubbling over, explains the chief economist to the biggest bank of Canada. RBC Financial Group’s chief economist Craig Wright notes that another round of tightening is likely to follow after a period of low interest rates. Wright points out that given the fast-growing real estate market in Canada, with building permits up with six percent over the last month, the pace is likely to slow over the next months. Is this a source of concern? In fact, Canada has managed to dodge the subprime problem, with equity in homes being higher than in its southern neighbor, explains BMO Capital Market’s chief economist Sherry Cooper. (Financial Post). If anything, Canadians have gone through worse and are now taking advantage of interest rates on hold.
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