Fixed vs Variable Rates in Changing Market
By Jean-Paul McDonald
Farms.com
The Bank of Canada recently reducing its key interest rate to 4.75%, farmers and agricultural businesses are presented with a timely opportunity to revisit their borrowing strategies. Krishen Rangasamy, the Manager of Economics at FCC, emphasizes that this change is crucial, especially given the economic pressures of the past year.
“This key interest rate has been increasing since March 2022. With inflation having peaked and now heading towards the Bank of Canada’s two per cent target, it makes sense for the central bank to provide relief to a struggling economy by lowering the overnight rate,” Rangasamy explained. He also indicated that further rate cuts might be expected later this year, which could make loans even cheaper.
FCC's recent study reveals that with the central bank's strategy to lower rates, opting for a variable rate loan might lead to lower payments over the next five years. However, if rate decreases are gradual, there might not be much difference in payments between fixed and variable rate loans. Still, fixed-rate loans offer the benefit of predictable costs over time.
Rangasamy suggests a balanced approach: “Borrowers should think carefully about their personal risk level given the pros and cons between fixed and variable rates,” he said. “An option that borrowers can consider is diversifying their debt portfolio by using a combination of fixed and variable rates. This allows them to benefit from both types and to spread their risk over different time periods. For example, a borrower could have a variable rate loan for a short-term project, and a fixed rate mortgage for a long-term investment.”
However, managing a mix of fixed and variable rate loans adds complexity. It’s important for borrowers to talk with financial advisors to choose the best strategy for their needs.
Despite the potential advantages of reduced interest rates, Rangasamy urges caution: “There are still risks with regards to both the global and domestic economies which, if they materialize, can have repercussions on Canada’s inflation and therefore interest rates. That’s why it’s important to stay informed, stay flexible and stay prepared,” he advises.
For more detailed guidance, farmers and agribusiness operators can visit FCC online or call their local FCC office at 1-800-387-3232 to discuss their financing options. This proactive approach will help them make the most of the current lower borrowing costs while preparing for future economic shifts.