The Effect of Rising Canadian Interest Rates on Your Finances

After nearly seven years, the Bank of Canada has increased the overnight lending rate, although by only a quarter of a percentage point, from 0.5 per cent to 0.75 per cent. The overnight rate is the interest rate that banks charge each other for short-term lending. The news-worthy part of this move is the fact that the interest rate has remained stagnant since September 2010.

Now, you’re probably wondering how this change will affect you when it comes to banking, loans, and credit cards. Let us break it down for you.

Mortgages

If you have a fixed rate mortgage, you won’t see any difference unless you decide to refinance, when you can expect to see a higher interest rate. As for variable rate mortgages, monthly payments will soon rise, but by only a small amount. Despite the recent quarter percent increase, variable rate mortgages have traditionally not fluctuated widely in Canada because of the stability of the economy.

Home Equity Loans

The terms of home equity loans are more favourable for lenders than first mortgages, and that’s one reason banks promote them. One popular way to borrow is to take out a home equity line of credit (HELOC), often for up to 80 percent of a home’s value when combined with the initial mortgage. Resist adverts that tell you any investment in your home is a sound one. Renovations or a new addition aren’t necessarily a good idea when you don’t know how high-interest rates are going to go in the next couple of years.

Auto Loans

This is one area in which rates are locked in for the life of the loan, so interest rate hikes won’t affect your current car payment. For the auto dealers, though, the days of zero-interest car loans are at an end. This was a real draw for getting people into the showroom and persuading them to buy a new car. The bottom line is that you’ll have a slightly higher interest rate if you decide to buy a new car. On the other hand, it’s less likely to be an impulse buy.

Student Loans

Like any other type of loan, interest rates on student loans will rise due to the increase. Adjustable rate loans will rise soonest, followed by a higher interest rate on new student loans.

Credit Cards

If you have built up a large amount of debt on your credit card, your monthly expenses may not necessarily rise, but it will take longer to pay off the debt. Loan consolidation could help in conjunction with making a strict budget and sticking to it. Those who have an emergency fund available will be in the best shape if interest rates continue to rise.

Credit Lines

Rising interest rates will only affect the credit lines of those who are over-extended financially. For those who hold modest debt, the expert advice is to pay down debt during the next year to avoid the effects of further rate hikes. It really depends on the terms of your credit line and how the debt is structured as to how much your finances will be affected.

Good News Ahead

The good news is that the interest rate has risen as a reaction to the robust Canadian economy. Household spending has been strong and the economy has rebounded at a slightly higher rate than expected. An immediate positive effect of the rate hike was a slight increase in the value of the Canadian dollar, which is expected to continue to strengthen.

Weathering the Changes

The effects of the recent small rate hike isn’t going to be extreme. It’s the willingness to raise rates that should cause caution when it comes to taking on more debt. There’s no guarantee that the easy lending terms of the past few years will continue. The best advice is to make a concerted effort to pay down debt and not take on any unnecessary financial obligations until it becomes evident whether rates will continue to rise.