Whenever interest rates start to climb, you’ll often see stories about how homeowners and line of credit borrowers have to adjust their budget and financial plan to cope with the potentially smaller disposable income level.
For example, when interest rates in Canada shot up between February 2022 and July 2023, anyone with a variable mortgage or line of credit would have found themselves paying an extra 4.75 percentage points in interest. This could obviously lead to some challenging decisions and serious belt-tightening.
When interest rates start to fall, however, the opposite situation typically occurs, which brings opportunities rather than challenges. Let’s take a look at what it could mean for you and your financial plan whenever interest rates fall, and how you could take advantage of them.
Lower interest rates mean improved cash flow
When the Bank of Canada interest rates drop, payments for mortgages and home equity/personal lines of credit often drop accordingly. Let’s take a look at the example of how rates dropped between spring 2024 and fall 2025. In that fairly short period of time, the Bank of Canada interest rate fell from 5% to 2.5%.
This meant that most variable mortgage rates, and interest rates for personal or home equity lines of credit (HELOCs), also fell by 2.5%. This could have made a considerable impact on your disposable income.
Let’s take a look at how much someone with a variable mortgage of $400,000 (making variable payments) and someone with a home equity line of credit balance of $70,000 could have seen their payments drop:
$400,000 mortgage1
May 2024 rate: 6.7% May 2024 monthly payment: $3,008
Sep 2025 rate: 4.2% Sep 2025 monthly payment: $2,459
Monthly savings: $549
$70,000 home equity line of credit balance2
May 2024 rate: 7.75% May 2024 monthly interest: $452
Sep 2025 rate: 5.25% Sep 2025 monthly interest: $306
Monthly savings: $143
These are both considerable sums of additional money, which could boost your cash flow and be put to good use within your financial plan. But how could you put this extra money to its best use?
Making the most of lower interest rates
Whenever your expenses (in this case, mortgage or HELOC payments) are reduced considerably, it can be tempting to use the extra money to improve your standard of living. However, you’ve been used to not having this money available to you, so when there are lower interest rates, this is the ideal opportunity to use that money to speed up your savings goals and boost your financial plan.
Let’s look at two examples of potential savings goals: saving for your child’s education and saving for retirement. How much extra could you save for these goals if you were to put these lower interest rate savings to good use?
Saving for your child’s education
Taking the saved amounts from our two previous examples, you could put either $143 per month or $231 per month (to reach the lifetime RESP contribution limit of $50,000) into your child’s RESP. Here’s how those savings could grow:3
Save the extra $143 interest payment from the HELOC and invest it in an RESP:
After 18 years, your child’s RESP could be worth as much as $55,811.
From the extra $549 from the mortgage payment, you could invest $231 monthly in an RESP:
After 18 years, your child’s RESP could be worth as much as $90,157.
In both cases, investing the amount you saved due to lower interest rates could have a considerable impact on your savings goals.
Saving for your retirement
If you use the money saved from those two examples to boost your retirement savings, the potential amount saved would be even greater, given the potentially longer time period involved:4
Save the extra $143 interest payment from the HELOC and add it to your retirement savings.
After 35 years, you could have saved as much as $204,895.
Save the extra $549 interest payment from your mortgage and add it to your retirement savings.
After 35 years, you could have saved as much as $786,626.
Obviously, these examples are hypothetical; having these interest savings over such a long amount of time would be unlikely, given the way that the Bank of Canada interest rates fluctuate. However, they do illustrate how you can best use an increase in disposable income due to lower interest rates to give your financial plan a considerable boost.
How to get started getting the most out of lower interest rates
If lower interest rates lead to you having more disposable income, the first step is to work out the most effective way to apportion that extra money.
An IG Advisor can help you use the extra money to boost your financial plan in the most effective way. They’ll look at every aspect of your finances and prioritize where the money can have most impact. Talk to your IG Advisor today to discuss how to best use your extra disposable income from lower interest rates. If you don’t have an IG Advisor, you can find one here.
Source:
1 With a 20-year amortization and interest compounded monthly, using a typical variable mortgage interest rate for the time.
2 Monthly interest payments only, using a typical variable HELOC interest rate for the time.
3 With an average annual return of 6%, interest compounded monthly, government grants and bonds not included.
4 With an average annual return of 6%, interest compounded monthly.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Advisor.
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