INTEREST RATES HAVE INCREASED - how are you affected?
July 21, 2017 | Posted by: Kim Lindsay
As we expected, the federal bank has increased the overnight rate by a 1/4% on July 12/17.
After years of being at the same rate, the increase was inevitable. The good news is that this means the government is feeling good about Canada's economy and felt the need to soften inflation going forward. The bad news is, this may affect your interest rates on many different financial products.
Canada has had really strong growth in the first quarter, and much of this growth can be attributed to Canadian’s household spending. By having this rate hike, it is projected that household spending will likely remain solid in the short-term, but is expected to slow down for the long-term. In addition to household spending, the oil and gas industry has seen adjustments as well, which will help Canada’s growth balance out from the year’s projected inflation. Many industries and regions across Canada are expanding and strengthening proving that Canada’s economy is on the rebound.
Following the Bank of Canada’s adjustments, GDP is expected to grow at a moderate rate for the next few years: 2.8% in 2017, 2.0% in 2018, and 1.6% in 2019. Regarding the overnight rate and our predictions for the future, it will be dependent on incoming data collected over the course of the following years.
So, broadly speaking and to summarize, Canada’s inflation will be softened and we will see gradual growth over the long-term, which is great! Now, for how you will be affected individually… you might be wondering which financial products will be influenced due to this rate hike?
Obviously, the variable rate mortgage will be affected immediately, but homeowners who locked in at a 5-year fixed rate, especially homeowners who locked in their rate right before the rate hike, will not be affected for the near future. Also, homeowners with a 5-year fixed mortgage, that have their renewal date coming up shortly, might still have the opportunity to lock in at a lower rate compared to the previous rate that was available 5 years ago.
HOME EQUITY LINES OF CREDIT (HELOC’S)
These loans generally go by variable rates and will be immediately impacted, mostly likely by a 1/4% with most lenders. If you have a hybrid type HELOC with a fixed portion, the fixed portion will not change.
Your credit card(s) could see a rate increase depending on if they are variable or fixed rate credit card(s). However, the majority of credit cards are on a high fixed rate, so most likely, you like not see an impact on your credit card statements. That is unless you start falling behind on your credit card payments due to other increased financial burdens, which could increase your rate.
LINES OF CREDIT
Lines of credit will be the most affected because they are linked directly to the prime rate, so you can expect an immediate impact.
Student loans can be fixed or variable. If you have a variable rate, then you will see an increase immediately and if you haven’t locked into your fixed rate yet, you will be locking into a higher rate. But if you have a fixed rate, you will not be affected.
Majority of car loans are on a fixed-rate but some banks offer a variable rate as well. If interest rates continue to rise, we might see future monthly car payments increase that, eventually, could affect the type of car Canadians choose to drive.
Increasing interest rates could have a positive impact on Canadian savers. Going by history, savings accounts have been affected by rate changes, so we hope this will increase the interest earned in savings accounts. Also, interest rates have been very low for the past few years, so this increase can help motivate Canadian to save more the more interest rates rise!
Having gone through the most common financial products that could be impacted by this rate hike, it is also important to remember that everyone’s situation is different, and there's a number of potential solutions for each person.
If you do have further questions on how this hike could affect you, please contact me, we can talk about it and formulate a strategy that will work best for you!
References: http://www.cbc.ca/news/business/bank-of-canada-interest-rate-loans-impact-1.4197831 http://www.mortgagebrokernews.ca/news/boc-interest-rate-revealed-228028.aspx