Low Interest Rates Double Edged Sword
“Low Interest Rates Are Great, Provided You Manage Your Debt Accordingly”
Mortgage interest rates continue to say at low levels, with talk that we could see record lows in the near future.
On the surface, this is good news as everyone would prefer to pay less interest than more.
But there is a dark under belly that everyone needs to watch out for as well.
Because we have had low interest rates now for a prolonged period of time, both consumers and businesses have begun to accept this as the normal, go forward cost of debt.
Realistically, this is not going to be the case, so its all about what your personal debt load and ability to service debt is going to look like when rates do go up, which we all hope is years down the road.
The longer low interest rates stay in effect, the more debt people take on because they get lulled into a false sense that the good times are here to stay.
A different way of looking at lower interest is that it provides a great opportunity to reduce debt. With less of your available cash flow required to service debt, there is more money at your disposal to pay down principal which in the long run will provide the most protection against future interest rate rises than pretty much anything else you choose to do.
But with variable mortgage rates near 2%, and real estate markets still on the rise in most parts of the country, its hard to not want to purchase that larger home and live closer to the edge, even though it doesn’t feel right now that there is much risk of any significant change in interest rates.
And if you follow some of the economists, its pretty clear they have no idea where things are headed either.
So its a case of how you choose to utilize the money that gets freed up on a monthly basis and how close to the line you want to live.
Most mortgages now a days have generous prepayment privileges that allow you to pay down the principal without prepayment penalties up to a certain amount each year. This is certainly a sound strategy that can shave years off your mortgage and thousands of dollars off your interest payments.
Alternatively, if you have some flex in your cash flow and can take on more debt to invest more money in a growing real estate market, the return can be substantial to you over time as well.
The key point here is that regardless of how you want to utilize lower interest rates today, its important to think about what happens when rates go up in the future.
Once again, hopefully interest rate rises are a long way away, but they are inevitable, so plan accordingly and manage debt wisely.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel