Is it a good thing Canadian interest rates are going down?

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There are indications lower interest rates are coming given a host of factors like the U.S.-China trade war, excessive debt levels and possibly overpriced stocks.

Much of the world is seeing record low interest rates, including Canada. A 10-year Government of Canada bond paid out an abysmal 1.16 per cent on the last trading day of August.

And rates could still drop further. In Europe, many government bonds are now trading at a negative interest rate.

Here below are some of the consequences of low interest rates for Canadian consumers.

  • Easier to buy a home in the short term

Canadian mortgage rates have come down by a full percentage point since the end of last year, and that means more purchasing power for homebuyers, or more cash in their pockets.

$750,000 house with 20 per cent down can afford $70,000 more for a house with the new lower rates ― or end up with $300 more in their bank account at the end of the month.

But in a tight housing market ― like the ones we see today in Toronto, Montreal, Ottawa and even Charlottetown ― that money will likely get sucked up by home sellers, in the form of higher prices.

  • Retirement savings grow more slowly

When interest rates are low, there’s little incentive to save. Canada’s savings rate has been below one per cent for the past year. And people have indeed been working longer, and well into retirement age these days. But that may also have to do with the fact that people are living longer and choosing to work past age 65.

  • Billions more for governments

If barely-noticeable interest rates are killing your retirement plans, maybe the government will be able to help out. Along with people who are selling homes today that they bought long ago, governments are the major beneficiary of low interest rates.

Ottawa’s budget projections assume considerably higher interest rates than the ones the feds are now paying. That means the government will have more money in its pockets than it expected ― about $2 billion more for the 2019-2020 fiscal year.

That money could be used to finance new programs, reduce the budget deficit, or cut taxes.

  • Lowered expectations for investors

Government and corporate bonds are a part of pretty much any balanced investor portfolio, so those of you who own mutual funds and the like should prepare for worse returns in the coming years. That part of your portfolio will be paying out less than it used to.

  • Business need to redefine ‘a good investment’

Business investment is pretty unimpressive in Canada these days, and that’s a bad sign, because it’s pretty much the only thing that drives job growth in the private sector.

But companies today may have excessively optimistic expectations and that may be keeping them from investing. For instance, if once upon a time you needed an 8-per-cent return to justify investing in something, well maybe today it should be 6 per cent instead. -CINEWS

 

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