Skip to content
Weekend Reading: Low Interest Rates Are Here To Stay Edition

Usually one needs to read the tea leaves to interpret the Bank of Canada’s forward guidance for interest rates and the economy. Not anymore. New Bank of Canada Governor Tiff Macklem was undeniably clear that record low interest rates are here to stay “for a long time.” 

It was no surprise to anyone that the Bank of Canada kept its key interest rate at 0.25% this week. More surprising was the unusually strong signalling that interest rates will stay put until at least 2023.

The Bank’s official statement said it would “hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved.”

Governor Macklem said:

“Canadians and Canadian businesses are facing an unusual amount of uncertainty, so we have been unusually clear about the future path for interest rates.”

This level of clarity is important for homeowners, too, as they think about buying a home or renewing their mortgage. Mortgage rates are incredibly low, with five-year fixed rate mortgages available at less than 2% interest, while 10-year mortgage rates are well under 3%.

Rate Spy Mortgage Rates

A five-year variable rate mortgage is still cheaper than its fixed rate counterpart. Variable rates also come with some degree of certainty that interest rates will hold steady for at least the next three years.

The problem is, with the Bank of Canada holding rates at 0.25%, there’s no upside for variable rate mortgage holders. I happened to benefit when the BoC made its emergency rate cuts this spring – it reduced my own mortgage rate to 1.45%. Variable rate holders won’t be so lucky in the future.

Paying off my mortgage early has never been a major priority in my financial plan. I’d much rather max out my tax sheltered investment accounts first before throwing extra money at my mortgage. Lower rates also mean more of my mortgage payment is going towards the principal balance, rather than to interest costs. That means I’ll achieve mortgage freedom faster without increasing my payments.

This Week’s Recap:

My investment portfolio(s) continue to recover and in some cases climb to new heights. My RRSP is only down 2.51% on the year – a far cry from the decline of -41.41% as of March 22. Hard to believe.

My TFSA is now up 2.14% on the year, thanks to the large lump sum investment I put into the account in mid-April.

I opened my LIRA on May 1st and that account is now up 10.07% since inception. Talk about great lucky timing.

The kids’ RESP account is down 0.32% year-to-date. We contribute $500 monthly (including CESG) to this account.

My RRSP, TFSA, and LIRA are all invested in the Vanguard All Equity ETF VEQT, while my kids’ RESP account is invested in TD e-Series funds.

This week I wrote about making rational versus irrational decisions when it comes to personal finance and investing.

One reader suggested I write an article about how to determine your sustainable spending rate in retirement – or what’s the maximum amount you can spend each year to age 95 without running out of capital. I’ve got some ideas to share with you, so stay tuned for that one.

Promo of the Week / Reader Question

I’ve received a few emails this week asking about how I set up my personal banking system to save on fees and maximize the interest rate on savings. This is how I do it, but your mileage may vary:

My wife and I have a joint chequing account with TD Bank and maintain a minimum account balance to waive the monthly account fees. We have the basic, bare bones account with minimal transactions. That’s because we put all of our transactions onto a rewards credit card and limit the amount of debit transactions and ATM withdrawals.

My wife has a separate no-fee chequing account with Tangerine.

I find Tangerine is still good for no-fee banking, but they’ve really dropped the ball when it comes to offering high interest rates on savings deposits. Outside of short-term promotional rates, the rate on Tangerine’s savings account is a pitiful 0.25%.

That’s why we opened a Savings Plus account at EQ Bank for our emergency savings. The account pays a high everyday rate of 2%, which is at or near the top of the market. Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.

Our investments are held at TD Direct (RESP, LIRA), Wealthsimple Trade (RRSP, TFSA), Wealthsimple Invest (wife’s RRSP), and Questrade (new corporate investment account). 

It would be nice to have all of our banking and investments in one place, but the fact is there’s no one bank or institution that offers every account type we need, doesn’t charge any fees, and pays the highest interest rate on savings deposits. Until then, we spread out our banking to get a bigger bang for our buck.

Weekend Reading:

Sticking with the mortgage theme, Michael James on Money says to think twice before taking a five year closed mortgage due to severe penalties for breaking the mortgage early.

You’re likely shopping online now more than ever. Our friends at Credit Card Genius share the best credit cards for earning cash back and saving on foreign transaction costs.

The Better Dwelling blog reports that Canadian real estate prices grew 29x faster than U.S. prices since 2005.

The Lowest Rates blog presents six personal finance pros on what it takes to become a ‘money expert’.

Here’s a good piece from MoneySense where four single moms get personal about their money matters and ask a pro for help.

Rob Carrick is spot on with this advice to young, app-focused investors treating the stock market like a game:

Free-trading apps are a fad that will fade, probably not without damage done to those who have treated investing like a game. The stock-market surge since March is not a test of anyone’s investing ability – everyone looks like a star trader.

But free-trading apps can also be a force for good investing. Here’s how: Use them to build a super-cheap balanced-ETF portfolio.

Chrissy at Eat Sleep Breathe FI shared a guest post on the Money We Have blog and listed four simple steps to financial independence.

Ted Rechtshaffen says holding cash is a sign of fear, and fear is the worst investment of all.

Downtown Josh Brown and Irrelevant Investor Michael Batnick discuss Gold versus the S&P500, Warren Buffett versus Elon Musk, and more in this entertaining edition of, What are your Thoughts?

An incredibly detailed case study from the Frugalwoods blog on a Canadian family’s plan for the future.

Here’s a great piece from the Wall Street Journal’s Jason Zweig: The South Sea bubble is the classic story of an investing mania. Are investors today any wiser?

Erica Alini reports how this Ontario man was promised a refund – then Sunwing changed its policy.

I loved this article by Des Odjick on how her blog landed her a dream job as a content marketer.

Finally, what many of us have been dealing with for months – the implications of working without an office.

Have a great weekend, everyone!

Print Friendly, PDF & Email

9 Comments

  1. Chrissy @ Eat Sleep Breathe FI on July 19, 2020 at 12:16 am

    Hi Robb, thanks so much for the shout-out! Crazy about those interest rates. We just renewed our mortgage in February at 2.89% fixed, three-year term. Looks like we’ll miss out on these ultra-low rates. 🙁

    • Robb Engen on July 24, 2020 at 3:04 pm

      Hi Chrissy, my pleasure! It’s tough to time the mortgage and interest rate market. All you can do is make the best decision you can with the information you have at the time. We’ve been lucky with variable rates, but could have easily been caught in a rising rate environment if the circumstances were different.

      At least you didn’t lock in for five years so there’s still a great chance mortgage rates will be under 3% when it’s time to renew.

  2. Pam on July 20, 2020 at 8:04 am

    I am thinking about buying a new house and renting my condo and these low interest rates really make me want to get things sorted sooner rather than later. I can line up fixed rates at a super low rate for a while for the mortgage on my condo and any I might need to borrow for the new house.

    But my high interest savings account interest is pretty miserable and that isn’t likely to change.

    My RRSPs and TFSA are actually up for the year (once you include deposits made) but that is better than I could have expected.

    I am also starting to dip my toe into Wealthsimple as most of my RRSPs are with Sunlife and while I have gotten good returns I know I am paying more in fees than I need to. I have started with my open account and if the process goes well I’ll move my TFSA next.

    • Robb Engen on July 24, 2020 at 3:06 pm

      Low rates are a double-edged sword for savers and borrowers. I wouldn’t make big decisions like a real estate purchase simply because rates are low. It has to fit in with your overall financial plan. Good luck with the switch to Wealthsimple.

  3. Scott on July 20, 2020 at 9:33 am

    Is it worth having cash sitting in a savings account for an emergency fund with rates so low?

    I’m tempted to moving it into vbal or something similar. 40k making less than 1% seems like a massive opportunity cost.

    • Liquid on July 23, 2020 at 3:06 pm

      @Scott.

      You’re probably right. 1% return isn’t even beating the long term inflation rate. Maybe you can put half of your $40K in VBAL, and the other half in a short term bond index, such as VSC which has an average coupon of 2.8%. This way you will have exposure to the equities market and gain from future stock appreciation, but also have downside protection from VSC which is less volatile.

    • Robb Engen on July 24, 2020 at 3:08 pm

      Hi Scott, I think the emergency fund serves a different purpose and so while I do believe you should try to at least keep pace with inflation, I think you can get into trouble trying to chase yield with funds that should be liquid and easily accessible.

      My best advice is to open an EQ Savings Plus Account, which pays 2% interest: https://boomerandecho.com/recommends-eq

  4. Gruff403 on July 24, 2020 at 7:43 am

    “Paying off my mortgage early has never been a major priority in my financial plan. I’d much rather max out my tax sheltered investment accounts first before throwing extra money at my mortgage.”
    I have been saying that for a few years now but people struggle with the psychology of having debt and miss opportunity. The bank that currently holds my mortgage is paying a higher dividend yield then my mortgage. Steady as she goes.

    • Robb Engen on July 24, 2020 at 3:12 pm

      Hi Gruff403, I hear you. On the one hand, you never hear anyone complain about being mortgage free, but on the other hand it doesn’t seem wise to be in a hurry to pay off debt at 1.45%. My initial thought was to tackle the mortgage next year and start doubling up on monthly payments, but now I’m thinking I’ll hold off on that for a while, wait until my wife’s TFSA is maxed out, and maybe even get started on investing in a taxable account.

Leave a Comment