by: Justice Mubayiwa
On Jan. 17 The Bank of Canada (BoC) raised its target for the overnight rate to 1.25%. Target adjustments for the overnight rate are echoed in interest rates for both mortgages and consumer loans. This hike marks the third 0.25 percent point increase since July of 2017 and the first time the rate has risen above 1 per cent in almost a decade.
In reaction to an increase in the policy interest rate, the big Canadian banks have raised their prime rates, which are used for variable-rate mortgages and other loans such as lines of credit.
For the average Canadian, the threat of rising interest rates isn’t necessarily bad. To put it simply the recent hikes will help savers and hurt borrowers. On one hand rising interest rates will provide a higher return for savers and others who rely on interest income to cover living expenses. On the other and, rate hikes have made borrowing more expensive. Specifically, these rate hikes over the last seven months should draw particular attention from Canadian citizens who hold mortgage debt. According to the Fraser Research Institute, close to two-thirds of Canada’s $1.8 Trillion in household debt is mortgage debt. That is $1.2 trillion in the form of mortgages, and only $500 Million by way of consumer credit.
For any prospective homebuyers, or owners of variable rate mortgages, financial uncertainty should be taken into consideration. Significant increases in the prime rate will increase your financial burden. If you are on a variable rate mortgage, you will be coughing up a few more dollars. A variable rate moves down or up along with the general interest rate level in the economy. The recent BoC hike means your monthly mortgage payments have already gone up.
It is typical for variable rates to be adjusted within hours or days of the Bank of Canada’s announcement. Again it is not all doom and gloom. For Canadians who are shopping for a new home, expectations of continued increases in the interest rate can be an opportunity to lock in a long term loan at a lower rate. Acquiring a pre-approval guarantees today’s fixed rates for up to 120 days which could allow new home buyers to protect themselves from future increases in the interest rate. Although it is impossible to tell the future, it looks as if a decade of low interest rates has come to an end. Citizens would do well to monitor spending habits more closely and be cautious of what kind of debt they are taking on. Going forward, the cost of borrowing money – for consumers, businesses and governments – has become more challenging in light of the recent interest rate hikes by the Central Bank.