In the regular interest rate announcement from the Bank of Canada, governor Stephen Poloz announced that the Bank would be maintaining interest rates at 1.50%, despite earlier hints that they might have raised interest rates earlier than necessary.
This decision comes at the same time that the Canadian dollar lost nearly 1.5 cents compared to the US dollar in just five days on the back of soured NAFTA talks. Add to that the fact that inflation reached 3% in July, 1% ahead of the Bank of Canada’s target, and it seems like a hike is inevitable.
Most analysts agree that October 24th is the likeliest date for the next increase. If the Bank keeps its pattern of increasing rates by a quarter percentage point, then rates will rise to 1.75% in a month and a half.
Only variable rate mortgages are immediately affected by interest rate changes. Banks often increase their rates a few hours after the Bank of Canada makes their announcement – since rates haven’t increased, there won’t be a change to your payments. If you have a fixed mortgage, your rate is secured until the end of your term.
If you’re house hunting now and worried that rising rates will make your mortgage more expensive, don’t worry! Most lenders offer the ability to hold a rate – sometimes up to 120 days. If you start mortgage shopping now, even if rates increase in October you’ll have your rate locked in (unless you choose a variable rate). The important thing is to start mortgage shopping now before rates increase!
No matter where you go, people are anticipating the next increase. From the commenters on the CBC who seem eager for the next increase to happen to the financial analysts who transfer money internationally and are hoping to get a good deal, there are many people that are actually looking forward to it. On the other side of the spectrum are homeowners with over a decade left on their amortization and any one of the millions of Canadians with a lot of debt who breathed a sigh of relief.
Increasing interest rates is one of the Bank of Canada’s weapons to control inflation. Earlier I mentioned that their target is 2% inflation per year. A little bit of inflation is good for an economy because it means you have to invest your money to get ahead instead of just holding it. If you simply saved your cash in a mattress for a decade, by the time you start using it, it will have lost value. With 2% inflation per year, your money would be worth 18% less in just 10 years. In other words, $10,000 in 10 years would have the same value as $8,203 today.
The only way to avoid losing value this way is to invest your money in places that earn 2% per year or more. Investing means that businesses have more money to expand and grow, which is good for employment and the economy.
When interest rates rise, the cost of borrowing money also rises. Because borrowing is more expensive, the amount of people and businesses taking on debt decreases, slowing spending. Slower spending means lower demand for goods and services, and prices have to drop (or at least not increase dramatically) for people to purchase a good or service.
Canada is one of the most indebted countries in the world, ranked 13th overall in debt per person. At the same time, we have some of the lowest interest rates in the world. Only 14 countries have interest rates lower than us. Our long stretch of low interest rates has allowed many Canadians to rack up large debts on things like mortgages and car loans. When the cost of financing is low, it can actually be cheaper in real terms to finance than to buy with cash.
Low-interest debt doesn’t require much money to service. If you take the money you would have used to pay for something (say, $50,000 for a new car) and instead invested that money, you would earn more in interest or equity than you would have paid to your creditor.
Now that interest rates are going up, those Canadians who took on a lot of “manageable” debt are going to pay the price – literally. More of their monthly budget will be going towards paying interest, and as almost half of us are living paycheque to paycheque, even a small increase can mean disaster.
That knowledge is why the Bank of Canada is so hesitant to raise rates too quickly. They have to juggle the need to keep inflation at their target and not send thousands or tens of thousands of Canadians into bankruptcy.
Rates are extremely likely to go up in 49 days. Before then, you should be paying down debt as aggressively as you can. Extra payments are more effective closer to the start of a loan than the end, so the earlier you make payments the better!
The best thing you can do if you’re looking for a mortgage is to shop around for the best deal. Even when rates go up, getting a variable mortgage can save you money in the long term. If you’d rather get a fixed mortgage, the lowest fixed mortgage rates will soon be going higher, so it’s better to lock them in now!