Canadian interest rates are unquestionably low. But, are they really as low as some believe? How is the current state of interest in Canada being wrongly perceived? Is any specific interest rate myth being exploited? Below are five Interest rate myths in Canada that are changing the landscape of how Canadians invest and spend.
Myth 1: Regular Canadians Are Seeing the Lowest Interest Rates in Decades
Some Canadians are, in fact, in a record low interest rate economy. The Canadians feeling the record-breaking results are major leaders in the banking institutions. Banks are seeing 1% interest rates on loans, but that does not mean any regular Canadian is seeing these benefits. The banks are receiving these loan rates from the bank of Canada. The rates are largely in a response to a strong economic slump that has permeated the country. The country has subsequently seen an explosion on home prices, which has encouraged the bank to take on extra apparent risk and promote 1% interest loans to the banks. But, the banks are not carrying that further. They are trying to recover from the rough economic transition, and that does it directly involve relaying their own savings to the lending consumers.
The myth is that Canadians believe they are earning extremely low interest rates, some of the lowest in the countries last 100 years. The truth is that major banks are seeing these record numbers, but they are rarely being passed onto the lending consumer.
Myth 2: Interest Rates Need to Go Up to See Returns in the Bond Market
Investors, particularly from the United States, are actually turned away from the bond market because of the low interest rates. They propose that the interest rates will need to increase to see acceptable returns and a more normal market. That myth is perpetrated by a lot of savvy investors that may be attempting to keep foreign investors out of the pool. Regardless, it is a mythical declaration. Interest rates in countries such as Japan and Germany are at record lows. Yet, their markets are seeing yielding results. The interest rates have little direct affect on the quality of the bond market, and that myth has caused a lot of investors to lose out on pleasant opportunities.
Myth 3: Interest Rates Are Getting More Consistent
Interest rates have a tendency to be extremely flexible, and millions of Canadians have felt this the hard way. A single missed payment, and an interest rate goes up accordingly. Individuals who get close to their credit line may see an increase after three months. Others may even close their account, which damages their credit score. Subsequent interest rates will go up without hesitation. Overall, the rates are dynamic and fluid. Despite the understanding that interest rates in Canada are low (though as discussed above, not that low), the inconsistency of the rates still remains problematic.
Myth 4: The FED’s Rate Increase will Dramatically Change Short-Term Borrowing Rates
Canadians of all kinds are preparing for the inevitable FED rate increases, but what effect will that have on the borrowers? The myth is that the effect will be damaging to long-term rates. The truth is substantially different. The Federal Reserve rate hikes will have a large impact on short-term rates, such as consumer credit. The long-term rates should be largely unaffected. This includes mutual bonds, corporate bonds, and mortgages.
Rates are changing in some impressive ways, but many are wrong about their presumptions. It may be easy to predict a future interest rate for some, but that is not a common occurrence. The myth is that interest rates are quite stable on an individual-by-individual basis. Many believe that the overall low slope in interest rates has caused them to stabilize, but that is hardly the case.