BUSINESS

Interest Rate Cut Gives You Breathing Room, Just Don't Borrow More: Experts

01/22/2015 04:23 EST | Updated 01/22/2015 04:59 EST
CP

MONTREAL — The Bank of Canada's surprise interest rate cut may provide some financial relief for borrowers, but experts say the main focus of Canadians should be getting their debts under control.

Despite the central bank's move, Canadians need to realize that today's rock bottom rate environment won't last forever, says Leon Garneau Jackson, BMO Global Asset Management's vice-president of sales for Eastern Canada.

"I don't see an immediate reason to panic, but rates will go up and that will put a stress on people's budgets,'' Jackson said.

The Bank of Canada cut its usually trend-setting overnight rate by a quarter point on Wednesday to 0.75 per cent.

The prime rates offered by Canada's big banks generally move up and down with the central bank rate. If they match the cut — something that didn't happen immediately this time — that means borrowers with mortgages and loans pegged to the prime rate will save money on the interest rate they are charged.

But that doesn't mean they should go out and borrow more.

Jackson suggests homeowners develop a plan to pay down mortgages and variable-rate loans while also thinking carefully before making big-ticket purchases.

While homeowners with floating mortgages might see some relief, they will also feel the pinch when rates head higher. That may prompt them to eventually lock in, although five-year fixed mortgages have been pretty low in the last few years.

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The Bank of Canada has cited household debt as a key risk to the economy. However, the central bank said it did not believe the rate cut would lead to Canadians borrowing more due to the uncertainty in the economy.

At an event in St. Catharines, Ont., Prime Minister Stephen Harper even weighed in, urging Canadians to be careful about how much they borrow.

"Interest rates are low, but we don't anticipate the kind of low interest rates we've had for the past few years to last forever. They're bound to go up at some point, so Canadians should make sure they're taking debt that they can carry in the long term,'' Harper said.

"The evidence is the vast, vast majority of Canadian households can carry the debt that they have, in fact the debt servicing burden for Canadian households has continued to fall in recent years, but obviously there are some people who are overextended because of low interest rates, so we would just urge caution on their part.''

National Bank chief economist Stefane Marion says lower interest rates will raise disposable incomes and stabilize debt-to-disposable income ratios that have been rising with higher home prices.

While lower rates may support home buying in Central Canada, Marion sees little risk of a borrowing binge, especially if job prospects remain uncertain.

With inflation being low, he said central banks in many parts of the world will be slow to raise interest rates, removing any urgency to reduce debt or rebalance their investment portfolios.

"That's not the story for 2015 or 2016, so what applies to consumers also applies to investors in my view.''