Bank of Canada rate hike implicationsSubmitted by Margaret Bennett on July 17th, 2017
Last week the Bank of Canada announced the first increase to the overnight lending rate in 7 years. Many people probably heard from their banks or mortgage lenders if they are currently in a variable-rate mortgage. But what does the rate hike mean?
At a basic level it means that the Bank of Canada, which monitors our monetary policy in Canada, is confident about the way that the economy is going and doesn't believe that interest rates need to be lowered to spur investment in the economy. It's important to know that the rate hike refers to the overnight lending rate, which is the rate banks charge each other to lend money. In recent weeks banks have been increasing their lending rates on many products in anticipation of a rate hike. Historically, we are still in a very low interest-rate environment, but rising interest rates may have an impact depending on your situation:
Mortgages are top of mind for many people, especially if they are near renewal, thinking of refinancing or in a variable rate mortgage. It's the most common question I have been getting so I asked my friend and financial advice colleague Alison MacKenzie, a mortgage broker with Mortgage Intelligence, to provide some meaningful commentary and questions for borrowers to consider. Her advice and commentary follows below.
Student loans and lines of credit
In recent years, more Canadians have taken on higher debt levels in the form of personal lines of credit (including Home Equity Lines of Credit). Higher interest rates may not have an impact on your monthly payments, but it does mean that more of your monthly payments will go towards the interest, instead of paying down the principal. This means that it may take longer to pay down the original loan amount. To maintain your amortization schedule, you will need to make higher monthly payments.
Most car loans have locked in interest rates so if you are already in a loan you should be okay with the same payments and term that you originally signed on for. But the days of 0% financing are probably nearing the end so expect rates to rise if you are considering a new loan.
Most credit cards are a fixed rate and unlikely to be impacted by this rate increase. If you use your line of credit to pay down credit card debt, watch out for the increase to your principal on your line of credit as noted above.
The Bank of Canada has three more policy interest rate announcement dates this year where they could announce another increase to the overnight lending rate:
- Wednesday, September 6
- Wednesday, October 25 (Monetary Policy Report also released)
- Wednesday, December 6
We have no way of knowing whether interest rates will continue to rise so the best advice is to stay the course with your regular investments, and make sure that you are doing what you can to reduce your debt. If you receive a raise at work, make sure that your debt repayment and automatic savings amounts increase correspondingly (ie: 2% raise at work = 2% increase in savings and debt repayment) based on our original comprehensive financial security plan. If you are concerned about your personal financial situation with regards to loans, or investments, as a result of increasing rates or generally want to review your current budget and situation, I would be very happy to meet with you to review the four cornerstones of your financial security plan.
I hope you enjoy a wonderful summer and I look forward to seeing you soon!
Thank you to Alison MacKenzie for this excellent commentary on mortgages:
I’m an independent Mortgage Agent with Mortgage Intelligence (Brokerage #10428) and a colleague of Margaret’s. With the Bank of Canada increase to the overnight lending rate, many institutions saw their prime lending rates increase from 2.7% to 2.95%. For people with Variable Rate mortgages, this means that your rate will increase by 0.25%. This 0.25% rate hike equates to about $36.95/month on a $300K mortgage. If you would like to calculate the exact increase in your monthly payment click here:
Many of our clients have been contacted by their lenders with offers for locking into fixed rates. Depending on your financial plans this may or may not be a good plan. Like investing, the type of mortgage you want depends on your risk threshold and your lifestyle. Here are some useful questions to consider when deciding between Variable and Fixed Rate Mortgages:
- How large is your mortgage and is it amortized over a long period?
- Do you expect to move or use equity to renovate or invest in the next 5 years?
- Do you have high-interest debt that you should consider consolidating in the next 5 years?
- Would it be a burden to find an extra $100 or $200 per month for mortgage payments?
- Does the thought of uncertain rates and fluctuating payment amounts keep you up night?
If you do end up switching to a Fixed Rate mortgage make sure that you fully understand the terms of the new mortgage. Ask your Broker/Bank about repayment options, the cost of breaking before the end of the term (Interest Rate Differential) and whether or not you are getting into a collateral charge mortgage. Make sure that the rate that they are offering is competitive and that you are fully informed about the terms of the commitment you are about to make.
I deal with several different banks and lenders and I am proud to be able to provide unbiased advice. Don’t hesitate to contact me if you’ve got specific questions!
905 745 5519