At Allan Bush Investment Team, our 30+ years of investment expertise have prepared us for the most recent trend of rising rates. We’ve seen it before, and know how to help clients navigate it in a successful way. Rising rates are no longer a surprise, given that they are the primary way the government deals with inflationary pressures. One could argue that it's surprising that we haven't seen them increase faster.

It seems like yesterday that we dedicated most of our meetings with our clients to discussing how we could get them more yield in their portfolios.

Thinking back a little further, we still recall the tailwind propelling fixed income portfolios higher as rates fell.

The common theme in all of those discussions was investments. The other side of that coin deals with debt. Most Canadians rejoiced as rates fell and the cost to carry any debt they had fell with them.

The nearly free ride of historical lending rates has ended, and the mathematics behind the rising rates off historical lows has surprised some Canadians. When 5-year discounted mortgage rates bottomed out in early 2021 at 1.39%[i] , homebuyers took on an unprecedented amount of mortgage debt. In September of 2023, those same discounted rates sit at nearly 5.25%, an astounding uptick of 278%.

Looking at an example, mortgage amortized over 25 years:

5-year rate	Monthly Payment	Interest paid	Total Amount Paid
1.39%	$1,184	$55,310	$355,310
5.25%	$1,798	$239,323	$539,323

 

Having debt levels of 5.25% is not high by historical standards, but if you borrow based on 1.39% and extend yourself a bit further than you might have wanted to because prices were rising, then a 278% increase in the interest cost can be catastrophic. Today, let’s focus on mortgages, but rest assured that other forms of debt, like loans, will fall into the same category.

Clients often ask us whether we advocate for paying down debt or investing for the future. When interest rates were lower than the return that was forecasted for the return of your investments, the question was up for debate, and you could make an argument for either course of action. However, in today's environment, an after-tax return may struggle to outpace the cost of borrowing, and if you happen to be one of the folks who may have extended themselves a bit further than you may have wanted to, paying down your debt may have jumped to the top of your financial planning objectives.

As with any financial decision, every situation is unique. And at Allan Bush Investment Team, we've been doing this for over 30 years and have witnessed many market cycles. This helps us take a look at your own situation and potentially provide you with a different perspective that may bring significant more value in the days to come.

 

[1] Historical 5-Year Fixed Mortgage Rates in Canada | Ratehub.ca