With today’s announcement that the Bank of Canada has decided to raise its key interest rate to 0.75 per cent, it’s first upward move to the cost of borrowing in seven years, I wanted to share what I think are some key insights on what this means for every-day Canadians.
The most obvious consequence of an increase in the Bank of Canada’s key interest rate is an increase in the borrowing costs of mortgages. If you own a variable rate mortgage, you can expect your mortgage payments to go up in the short-term. Those with fixed-rate mortgages, you can expect that at the time of mortgage renewal, available interest rates offered by the various banks and lenders will change with the evolving interest-rate environment.
Just as significant, home-equity lines of credit or HELOCS have become very popular vehicles that Canadian home owners have levered to access equity from the ballooning values in their home. Interest rates on HELOCS tend to hover between 0.5 and 2 points above prime so they tend to be a more costly form of debt than say mortgages according to a recent CBC article. Expect an increase in the costs of this form of debt.
Also, other loans linked to a bank’s prime rates such as car loans or simple lines of credit are also poised for an increase in the cost to borrow.
According to the CBC, in a statement accompanying the rate decision, the central bank supported its decision to increase rates by suggesting that the Canadian economy has been robust, fuelled by household spending. The bank has also foreshadowed the potential for additional increases this year.
So with today’s news, the best way you can both survive and thrive through an increase in interest rates is to review your debt obligations as a whole to ensure you have a proper debt retirement plan in place that will ensure you don’t experience a catastrophic financial disaster as a result of the rise in interest rates.
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Authored by Isaac Musial
The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including without limitation, financial, legal, accounting or tax advice.
Sources: http://www.cbc.ca/news/business/interest-rates-helocs-canada-debt-1.4192847