What We Do When Interest Rates Rise

by Pam on September 20, 2010

As most of you know, the Bank of Canada raised interest rates again on September 8th and as a result, my husband and I decided it would be a good idea for us to put another $5000 towards our open variable mortgage.  Although our interest rate is only at 3%, we know that we can get less than half of that in interest if we keep it in a savings account.

If our plan was to stay in our existing house for another 5 years or more, it would be really tempting to just fix our mortgage as the fixed interest rates are still really reasonable right now, and it is certain that the interest rate on our variable mortgage will continue to rise, albeit more gradually for the next little while.

In our case, we are planning to sell our home, possibly as early as next Spring, so it makes the most sense for us to keep our mortgage open so we are not penalized when we sell.  However, if you have an open variable mortgage, it might not be a bad idea to shop around for the best mortgage rate and lock in your mortgage.  The rates are really reasonable right now and this might be your ticket to peace of mind as interest rates continue to go up.

It is a bit risky for us to put so much of our available cash into our mortgage, but we have made sure to still keep some money accessible as our emergency fund.  Our hope is that we will be able to sell our home fairly easily and then be able to access the equity in our home.  Our current savings account interest rates are just barely over 1%, so we know that by putting our money into our mortgage we are basically “earning” 3%, since we pay that much less to interest on our mortgage.

So far we have found that by putting $5000 down every time the interest rates rise, we have managed to keep paying the same amount of interest out of our payments, rather than having it increase even though the rate has risen.

We are assuming a lot of things, though.  We are assuming that it will be easy to sell our house so that we can access our money in our house whenever we need it.  We are also assuming that we won’t have a huge emergency that causes us to be pressed for cash.  We have about three months worth of living expenses available in cash should we need it, but it can be a dangerous thing to put too much money into your home.  This is not advisable for everyone, although if you do have excess cash available and you have debt, you may want to consider paying down a portion of your debt to save on interest costs.

The most important thing is to make sure that you do not put too much money into your home and put yourself in a position where you have no accessible cash for living expenses and emergencies.   On the flip side, there is no point in having excessive amounts of money doing nothing in low interest savings accounts.  Make sure to maintain a proper balance to make your money work hard for you. Review your accounts on a regular basis and as the balances increase, make wise decisions based on your current and future life goals.

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