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Don’t Allow Low Rates Entice you to Take Risk

30 June 2012

You might think that the biggest risk that comes with low Bank of Canada interest rates is that homeowners take advantage of them by scooping up HELOCs and home equity loans faster than they can say the words. It’s not unreasonable to think that’s the biggest risk. After all, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have been warning about the perils of doing so for some time. And while those might be the biggest risks, there’s still another risk on the horizon – that’s choosing high-risk investments rather than low-interest savings accounts.

The problem is that those who have been scrimping and saving in even high-interest savings accounts have found that they’re not getting any returns on their investments. And while homeowners and borrowers might be hoping that rates never go back up, those scrimpers and savers are just waiting for the day that they do. And, while this may be problem enough, those savers have now waited so long, with so little returns, that they’re simply becoming tired of waiting. So, they’re turning to risky investments like the stock market instead, hoping to get a large return in a short amount of time.

But Peter Aceto, president of ING Direct, says that’s not a wise move. This is most obviously because these investment strategies are so risky. And because, while they may not provide much of a return, at the very least your initial investment will still always be there; something that’s just not true in other markets such as the stock market. And he says, you also can’t use the money you have tied up in the stock market as an emergency fund, or as a savings account when you’re trying to stockpile a down payment. Instead, he says, the only real risk with the low interest rates is what we’ve thought all along.

“The concern really is for those who borrowed during this low interest period,” he says, “perhaps more than they could afford, and the amount of debt they’re left with when interest rates eventually rise.” And of course, those who panicked and put all their money in the stock market.

Low interest rates are good for many; but they sure can be aggravating for committed savers. The only real advice is the same that’s given to homebuyers when rates are far too high: relax, and wait. Interest rates never stay the same and while they may not be working in your favour now, that savings account is worth hanging onto; and the rate of return you see on it will soon go up. Mark Carney promises so.

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