FallingInterestRates

The Bank of Canada recently cut the key rate to 0.75% – but that’s nothing to Denmark and Switzerland, where the key rate is actually negative(!) (that’s right – you can buy a $1000 bond now, and be guaranteed that at the end of its term you will only get $990 back – at some point it makes more sense to keep your money in a shoebox under your bed!)

So, what does that mean to YOU?

Well, if you currently have credit card debt, or are locked into a closed fixed-rate mortgage, then one thing it DOESN’T mean is that your interest payments are going to drop; your credit card company feels no need to pass on that drop in interest rates to you, and you’ve entered into a contract with your bank on that mortgage.

But it DOES mean that you should be thinking of ways that you can turn some of your high-interest-rate debt into low-interest-rate debt.

1) if you’ve got a good credit-rating (and the self-discipline to NOT go on a crazy spending spree), then opening a line of credit at your bank would be a great thing to do (I have an unsecured line of credit at my bank, and the interest rate right now is 4.85%).

There are different ways to use that line of credit once you’ve got it:

if you’re committed to paying off your credit cards as quickly as humanly possible, then one great way to speed that up would be to borrow from your line of credit to pay off your credit cards (and freeze your credit cards in a bucket of ice to make sure that you don’t rack up a bunch of new debt, now that you’ve got such a wonderfully low balance), and then make those payments against your line of credit instead. The drop in interest from 20% to 5% will make a difference

Eg. Say you owe $5000 on your credit card (at 20% interest), and you’ve decided to pay it of over the next two years, by paying $250/month. If you could drop the interest rate to 5%, and stick with your $250/month plan, you’ll pay it off 3 months earlier, and save about $800 in interest.

Or, if you don’t have any debt to deal with, you could consider using it they way I use mine:

For me, it acts as a short-term emergency fund. Which means that I don’t have to keep a pile of money sitting in a bank account earning next-to-no interest just in case an emergency should arise. So I can keep my emergency fund invested in slightly-less liquid, slightly-less accessible investments (and earn a better rate of return by doing so).

It costs me nothing to do this. And if an emergency need for cash DOES hit, I can quickly access the cash in my line of credit, and take a bit of time to sell some investments and transfer the out to my checking account (and pay off the line of credit).

2) if your mortgage term is approaching an end, rejoice!

This is a fantastic time to be refinancing your mortgage. You could lock in a ten year fixed-rate mortgage for under 4%!

But remember, if you manage to negotiate a lower rate on your next mortage term, try not to give in to the temptation to use that to lower your mortgage payments. Instead, take advantage of that lower interest rate to get a shorter amortization period – pay it off in 15 years instead of 20, and save tens or even hundreds of thousands of dollars in interest!

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