The Bank of Canada raised interest rates from 0.5 percent to 0.75 percent last month and you might be wondering what that means for you (or what that means at all). Don’t fret, it’s not actually as bad as it sounds. In fact, it’s kind of an indication that the Canadian economy is doing really well right now (even if it doesn’t feel that way). Here are some answers to your burning interest-related finance questions.
Why did BoC raise the rates?
The economy is doing pretty well right now and often with that comes inflation, of which there is very little currently. Raising the interest rate is like a preemptive strike against inflation in the economy. Basically, raising interest suppresses spending a little to keep everything steady. Plus, historically, this is a pretty tiny hike and the interest rate is way lower than it was, say in the 1980s.
Is this bad for Canadians?
The biggest concern for Canadians is the household debt a lot of us are carrying. Canadian debt is at an all-time high, and it’s perfectly understandable to be a little concerned about paying it off, especially when rates just went up (and will likely continue to rise in the coming years).
The good news is, this little hike of just 0.25 won’t break you. It might scare you into spending more wisely or paying down some debt–which is exactly why they raised it in the first place.
If you’re a saver though, there might actually be some more good news. Investments that have a fixed rate of return like Guaranteed Investment Certificates (GICs) tend to raise rates when interest rate hikes are introduced. It hasn’t happened yet, but that’s another potential positive for some of us.
What loans are going to feel the heat?
Anything with a variable rate will feel these effects right away. Business loans, student loans, lines of credit and home equity lines of credit (HELOC) are often tied to variable rates.
Credit card interest rates are typically fixed so you probably won’t feel anything there (phew!). Your credit card company and bank have to inform you before they raise your interest rates on your card, so at the very least, you’ll know what’s up (even if there’s nothing you can do to change it–knowledge is power).
Does this mean the housing market will plummet?
Rising rates don’t automatically mean a cooler housing market or falling house prices. The Canadian Real Estate Association’s monthly stats show that home sales fell in 16 of 26 major Canadian markets in June, but that started happening before the hike in interest rates. According to real estate experts, a 0.25 percent increase is not going to have a major effect on the housing market.
According to finance writer Melissa Leong, how much the cost of real estate falls will be dependent on how frequently the interest rate is raised in the coming years and by how much. Looks like the housing market is still a waiting game for now (unless you’re rich, obviously).
What does this mean for my mortgage?
If you have a fixed rate mortgage, you’re all good until it’s time to renew. Yay! But if you’re part of the 29 percent of Canadians who have a variable mortgage, you’re going to feel every change to interest rates.
Don’t panic about this little hike if you have a variable rate mortgage though. Historically, you save money if your mortgage isn’t fixed. The rates are going up right now, but when they come down, you’ll feel it too.
Can switching to a fixed rate mortgage be better in the long run?
Like we said, it won’t be cheaper, but what you choose is up to you. If you’re a worrier and you don’t want to live in constant fear that your interest rate may go up, opt for fixed for your own peace of mind. Be aware though that if you’re switching during your term (i.e. before it’s time to renew) you’re not going to get the best rate, and you’ll be locked into it.
If you’re looking for stable, go fixed. If you’re looking for cheaper in the long run, you’re going to want to go with variable.
What can we do to minimize the effects of rising interest rates?
Leong suggests stress-testing your budget for interest rate increases. Look at what a one or two percent increase in your debt would do to your life and ability to save for other things. If this small interest rate hurts you or you believe another one would do you in, look at where you can cut back spending. This might be the time to reevaluate the whole budget.
If you’re looking for a new line of credit or a mortgage, shop around. Don’t just sign up for the first one your bank offers you. Get a broker or bring in a competing offer to give you an edge and hopefully get you a better deal.
Remember: don’t bite off more than you can chew. We all need to be smarter with our debt and there are ways to do that, we just might not like them. Sometimes the only answer is to go smaller or save more. That’s just reality.