5 wise money moves to make before the BoC raises rates

1. Consider switching to a fixed-rate mortgage

Mortgage rates fell to record lows during the pandemic, and eager homebuyers went wild.

Home sales went wild when incredibly low rates made buying more affordable for some prospective buyers.

But if you were enticed into a variable-rate mortgage, it may be time to think about converting it to a fixed-rate loan. That’s because as soon as the BoC raises its interest rates, banks and lenders follow suit on their variable rate loans.

Fixed-rate loans, on the other hand, are guaranteed for a certain period of time, which means this type of debt won’t be affected immediately by higher interest rates.

The same goes for reverse mortgages or home equity lines of credit (HELOCs).

Savvy borrowers should look at all their options. If a variable rate mortgage is considerably cheaper, then it may still be the right type of loan for you. Especially since — compared to fixed rate mortgages — they’re usually easier and cheaper to break if your situation changes.

But if you’re looking for stability and predictability in your mortgage payments, locking in a fixed-rate loan may be your best option.

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2. Work on your credit score

Since the best interest rates are reserved for those with excellent credit, anyone whose credit score is less than impressive could find their borrowing costs become expensive.

To improve your chances of getting favourable rates now that money is increasingly expensive to borrow, you may need to pay down existing debt and take other steps to raise your credit score.

While there are a handful of factors that influence your score, your payment history and the amount you owe account for a major chunk.

Stay on top of your payments and avoid maxing out your credit card — even if you plan to pay it off before the end of the month. A good rule of thumb is to try to avoid using more than 35% of your credit limit. So if your limit is $10,000, try not to go over $3,500 in debt.

And don’t take on new loans or apply for other credit for a while; that can cause your score to drop.

Boosting your credit score will make you a more attractive borrower to all types of lenders — from credit-card issuers to those offering mortgages.

3. Deal with your credit card debt

The pandemic made it difficult for Canadians to travel, eat in restaurants or go shopping, and many used the money they didn't spend on those activities to increase their savings and pay down debt.

A poll from CIBC late last year shows one in five Canadians made paying down debt their top financial priority for 2022.

But many continue to struggle with their debt load. Of those who took on more debt last year, 37% told CIBC it was because their expenses exceeded their monthly income.

If you’ve been relying on your credit cards to make ends meet, the expensive interest adds up quickly. And as soon as the BoC raises rates again, you may find that pace will increase.

Anyone carrying a balance on their credit card should clear as much as they can before rates go up. If that’s not an option, rolling your balances into a lower-cost debt consolidation loan could help you save a substantial amount of interest and help you get out of debt sooner.

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4. Find a safe haven for your money

After two years of the stock market setting record-breaking highs, inflation has stepped into the spotlight to pull attention. In May, inflation hit 7.7% — the highest rate on record since 1983.

And with interest rates on the rise, supply chain shortages, Russia’s war in Ukraine and the pandemic, investors are justifiably feeling battered and bruised lately.

Now’s the time to dial down the risk in your portfolio and look for safe haven investments to help you ride out any turmoil.

Gold is traditionally the first investment you might think of when you hear the term “safe haven,” but real estate investment trusts (REITs) and guaranteed investment certificates (GICs) are also good fits in this climate.

As for individual stocks, think consumer products like Warren Buffett’s beloved Coca-Cola. Or banks, which tend to do well when interest rates rise. Most of Canada’s big five banks also pay dividends to their shareholders, which offers a nice extra boost a few times a year.

5. Revisit your budget

Now’s the time to buckle down and find some fat you can trim in your budget. While you can’t do much about rising cost of groceries of gas, you may still be able to find room in your current budget to lessen the impact of rising rates on your bottom line.

See if you can cut down on your streaming services. Perhaps you can reduce your cellphone’s data plan if you’re just using Wi-Fi at home. You and your partner can also make dinner together at home more often instead of going out for date nights. Before long, you may notice you have a little more breathing room.

And if you don’t already have a formal budget, it’s time to draft one. There are all sorts of free budget tools available online, including one from the Financial Consumer Agency of Canada.

According to the FCA’s data, people who don’t use a budget are twice as likely to fall behind on their financial commitments. They are also more likely to spend more than they earn, and more likely to have to borrow to meet their needs.