Economic trials happen as a matter of fact and a matter of pattern. I may be dating myself, but if you remember the 1980s with double-digit inflation and double-digit interest rates, you may be a little gun-shy about making major purchases right now. Although times of economic uncertainty can be trying, they are also very predictable.
When we focus on the long-term (10+ years), it’s easy to predict what’s going to happen. Market trends, although not exact, follow predictable patterns of bear and bull markets. Trying to accurately predict these patterns is what gets most investors into trouble.
But there are some basic rules. If you’re focussing on the long-term (like retirement), stick to your plan and relax: the outcome is predictable. When dealing with shorter-term goals, things are not so simple.
If the purchase of a condo or house is in your immediate future, you have some fast and hard decisions to make. When you add economic pressures like looming recessions to the mix, it becomes difficult to plan your next move. With the prime rate at 5.75 percent, you may be tempted to look at short-term (variable) financing as a viable option; however, in uncertain times like these, you may be making a crucial mistake.
With five-year fixed mortgage rates hovering around the six percent mark, they are still the best bet for a first-time homebuyer. On average, your mortgage will be equal to $640 per month for every $100,000 of mortgage. As long as you stay within your affordable range, you’ll have five years with no worries about coming rate fluctuations in the market.
Buying property is still a good option when compared with ever increasing rent payments. If you’re paying more than $1,200 a month for a two-bedroom apartment, you could be financing a $200,000 property (assuming a five percent down-payment and a mortgage of $190,000).
The worry of mortgage renewals at a higher rate of interest should be of little concern. Remember when I mentioned the rates of the ’80s? Since then, our government has done an admirable job of controlling inflation and interest rates. Double-digit interest rates haven’t existed since 1991. Once you have five years and some equity under your belt, your options become more varied, including re-financing to longer terms, if required.
The same principals apply for short-term investments. If property is not in your immediate future, reviewing your short-term investment strategy may pay off well. Most people look toward GIC’s (guaranteed investment certificates) when interest rates are unstable; however, locking-in at the now lower rates will only serve to secure smaller returns. Consider, instead, capital yield products that give you stability, along with the opportunity to benefit from rising rates. These products also have tax deferral benefits and qualify for the capital gains deduction.
Having an equity mix in your non-registered portfolio will also help to increase your overall returns. When the markets are good, you’ll be thanking yourself for the diversification. These investments can also provide for tax deferral, unlike interest bearing GICs. When the economy weighs on your mind as it’s weighing on your portfolio, it’s not the time to react to the markets. Make your decisions based on historical patterns that typically repeat themselves.
Don’t let economic changes prevent you from making decisions about investment planning or major purchases. If you don’t get in the game, you won’t lose, but you also won’t gain.