The most exaggerated warning in personal finance is that rising rates will crush borrowers

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Second, using the threat of higher rates to influence behaviour taps into an unpleasant moralistic strain of personal finance. Borrowing is sinful and higher rates are like a wrath of God punishment. But nagging people about debts using the threat of higher rates is so lame. First off, it doesn’t work. If people feel they personally have economic stability, they will borrow more. We’ve seen that with home buying in the pandemic, and with other kinds of debt in prepandemic days. We borrow for all kinds of reasons: because our jobs don’t pay a fair wage and we can’t make ends meet; because of a family emergency such as a job loss; because it’s near impossible to pay for a renovation, a car or a house with cash; because we want to invest in ourselves or in financial assets such as stocks; because it is human nature to sometimes want more than we can afford; and because we’re submerged in messages delivered online and by social media to buy and consume.

We need higher interest rates because the rates of today are too low to be permanent. They inflated house prices to shocking levels and strangled returns for seniors and others who need to keep money safe while generating some income. Higher rates would be a strong back-to-normal sign after all the pandemic-driven upheaval. Story continues below advertisement

If you’re a borrower, you should prepare for higher rates by the end of next year. Audit your household spending to find money that could be deployed if necessary to cover higher payments on mortgages, lines of credit and loans. As the pandemic grinds on, we’re starting to hear more about expectations for higher rates ahead. That’s why it’s a good time to have a hard realist’s discussion about the rate outlook for borrowers and savers.

The Bank of Canada’s overnight rate sets the trend for variable-rate mortgages and lines of credit. If you have those, you’ve got at least nine months of peace ahead of you. Fixed-rate mortgages are influenced by what’s happening in the bond market. Check out the five-year Government of Canada bond if you want to get a sense of what’s in play for banks in setting five-year mortgage rates. Story continues below advertisement

The most recent numbers were a letdown – the economy actually shrank from April through June and output remains lower than it was before the pandemic started. The Bank of Canada would have had this development in mind when it projected last week that its benchmark lending rate will remain at the current emergency lows until the second half of next year. Enough with judging people. Let’s cool it on the warnings about an interest-rate reckoning and instead look at what might actually happen in the economy.

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