Shalom, my darlings.
Since we last spoke, I’ve been extremely preoccupied changing my entire personality after spending exactly one month in Europe.
I now wear a necklace engraved with my Hebrew name, begin my newsletters with “Shalom, my darlings”, and not-at-all casually begin every other sentence with “Oh, well when I was in Israel…” (strong emphasis on the “I”).
I have been further preoccupied with having to explain to everyone who will give me even half-an-ear to listen just how hard it is to get back into a work routine after spending all this time on vacation. It’s just such a lifestyle adjustment, you know?
In short, I have become the worst version of myself.
But to defend the latter plight, churning out words for the masses (financial words at that!) is a sure-fire way to reach existential levels of burnout – fast. I always forget the toll turning crazed thoughts into legible prose can take on a person.
Nevertheless, I shall forge ahead to deliver you all the latest in the terrible world of finance. And let me tell you, it is particularly terrible at the given moment.
This is a bedtime story:
In 2019, the people of Earth are plagued with a worldwide pandemic. They are mandated to stay inside at all costs. A handshake, hug, or God forbid a European greeting are considered hate crimes. The people begin to do awfully embarrassing things like filming themselves making banana bread or executing small-movement dances and sharing them to the internet ether. It all gets very weird for a moment here.
Fast forward two years later – after much vaccination and much subsequent screaming about vaccination – the people are released from their homes. And like a gaggle of teenage girls charging a general admission Justin Bieber concert circa 2010, there is no stopping their new lease on life – the moment will damn-well be seized, or they will be bulldozed trying.
The people look to spend their money on anything and everything that matters: travelling to Italy, fancy dinners, concert tickets, a new workout set from Lululemon, coconut mylk matcha lattes, etc.
But oh no! There is a problem! Demand is higher than supply and the barista has run out of coconut mylk entirely. Your matcha latte is now $12.50 instead of $7.40. (This is a metaphor. I am talking about post-pandemic inflation).
In response, (because the government is just devastated about the coconut mylk situation) the Bank of Canada makes the brutal decision to hike interest rates so supply can catch up.
*This nightmare is too long to add in the whole B plot of a war in Europe – that is a charmer for another time.
So How Do Rising Interest Rates Affect You?
(Strong emphasis on the “you” because we are becoming the worst version of ourselves).
When you think rising interest rates you probably think:
1. Ew, boring and
2. Ew, expensive mortgages
You’d be right. But here are some other ways that rising interest rates impact your life:
- Borrowing becomes more $$$!
First and foremost, when interest rates are hiked really sexy things like home equity loans or lines of credit become more expensive.
When interest rates increase, consumer behaviour can change (which was the government’s aforementioned goal regarding the whole coconut mylk crisis – again, I don’t think there was a literal coconut mylk crisis, I am using this as a metaphor). Higher interest rates can lead to less disposable income and that, in turn, impacts the economy.
It’s not rocket science people, it’s just boring science.
And speaking of boring, this whole scenario is designed to make people think twice about how often they go out for a spicy marg or whether to take that spontaneous vacation to Nicaragua.
- Businesses also get, for lack of a better term and interminable jetlag, f*cked.
It would be discriminatory for borrowing costs to only rise for individuals, so, as such, they climb for companies too. When the Bank of Canada is feeling flirty, they will lower rates to encourage businesses to invest in their operations. (The Bank of Canada is not feeling flirty these days).
Rising interest rates mean business owners have to pay more to borrow money. And these business girlies really get the one-two punch because if consumers are spending less, businesses sales will also fall.
- The housing market goes on vacation.
Just like my time in Jerusalem had an impact on me, higher interest rates have an immediate impact on the demand for homes.
If you’re a homeowner (I’m sure you’ve already gathered), your mortgage payments will probably increase for both variable and fixed rate on renewal.
If you’re an aspiring homeowner, qualifying for a mortgage becomes increasingly difficult and therefore reduces the number of new homebuyers in the market.
If you’re the housing market, your demand is nominal. You can go on vacation.
- Inflation should start to go down!
I’m not here to send you all spiraling into a what-is-the-point-I-can’t-even-get-my-coconut-mylk depression.
Rising interest rates also have positive impacts for consumers and investors.
When borrowing money becomes more expensive, consumers tend to spend less and therefore reduce the demand for certain goods. This reduction in demand normally leads to a drop in prices, which in turn reduces inflation. Your lattes will go back to their regular overpriced glory in no time (versus the current sell-your-kidney overpriced hellscape we currently live in. A girl really cannot get her matcha latte in peace these days).
- Savings grow faster.
More positivity to send you forth on this Monday.
Rising interest rates mean investors can earn more money. The interest on bank savings accounts and guaranteed investment certificates (GICs) (which fall whenever rates drop), should begin to rise as the overnight rate increases.
That was a whole jumble of words to basically say: you’ll earn more money on that high interest savings account.
Until next week…