The Bank of Canada announced today that they’re raising the target for the overnight interest rate to 1.75 per cent, an increase of 0.25 per cent, or 25 basis points. This is the third increase in 2018 and the fifth increase since July of 2017.
Canada had one of the lowest interest rates in the world in 2017, but since then we’ve crept up the rankings. Interest rates are still lower than in the United States, but among other major economies our rates are now among the highest.
That doesn’t mean that rates are unaffordable, despite nearly 1/3 of Canadians “fearing bankruptcy” because of these latest increases. But with consumer debt sitting at $1.69 for every $1.00 of disposable income, even small increases will have a strong effect on at least some Canadians.
The Bank of Canada is aware of the massive amount of debt owned by the average Canadian, which is why they committed to a “gradual approach” when raising interest. The word gradual is missing from the latest statement, which you can here on the Bank of Canada website. In it, they say:
Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.
So it seems that more rate hikes are in Canada’s future. How will that affect you?
Rates were steadily declining from late 2013 until the July 2017 increase, meaning we enjoyed nearly half a decade of renewing into lower rates. Now that we face the reality of renewing into higher rates, many are worried about affording their mortgage.
You can see the uptick at the far right end of the line.
If you have a fixed-rate mortgage, there’s no immediate impact on your monthly payments. For as long as the term lasts, your interest rate and monthly payments will remain the same – that’s the whole point!
If you still owe money when your term ends, you’ll have to renew your mortgage. That’s the time when you’ll start to notice a different to your potential monthly budget, as interest rates could be several points higher than when you first got your mortgage.
If you have a variable rate mortgage, you will end up paying more interest starting today. You may or may not notice a difference in your payment, since many lenders will simply adjust the percentage of your payment going towards interest rather than increasing your payment – but you will feel the effect over time.
The average home price in Canada is $487,000, according to the Canadian Real Estate Association. A current variable rate mortgage on that house with 10% down amortized over 25 years at the previous best mortgage rate of 2.65% would have payments of $2,059.
A 0.25 per cent increase would increase those payments by $57 per month, up to $2,116. That’s an additional $684 per year.
Home equity lines of credit are variable products, so they’ll feel the immediate increase. Unlike mortgages, there’s no set payment that covers both interest and principal repayment. HELOCs are interest-only, so if you only ever paid the minimum payment you’d never pay off the loan.
Depending on how large your outstanding balance is, your minimum payment could up quite a bit, but unless you’re purposefully avoiding paying the principal (perhaps you plan on selling the house soon) then your payments won’t change.
Home equity loans are usually fixed rates, so you won’t notice a difference in your monthly payments.
Whether you have a mortgage, home equity loan, or both, you want the best rates. Now that rates have gone up, what can you do?
The easiest way to save big on your mortgage is to shop around. Don’t sign the renewal letter you get in the mail as soon as you get it. Take a couple minutes to talk to a broker or shop online and see what kinds of deals are out there. Brokers will often have better rates than the bank.