If you’ve been paying attention to the news, you may have heard that the Bank of Canada has decided to raise its rate by 25 basis points. This brings the rate to 1.5%. This is the fourth time in a year that a hike has occurred, but what exactly is a rate hike? And what does this mean for Canadians?
What Is a Rate Hike?
These hikes affect the overnight rate. This is the interest rate at which major financial institutions borrow amongst each other. Changes in the overnight rate are made to help keep inflation between one and three percent. Low, stable rates allow for a steadily growing economy, which creates jobs. Growth that happens too quickly, however, can lead to high levels of household debt and inflated housing prices. Because of this, the Bank tends to cut its rate to stimulate the economy and raise it when if wants to manage inflation. In the current economic climate, the Bank needs to take the tariff disputes into consideration. And while experts suggest they won’t make a massive impact, they are still worth noticing. Since 2000, the Bank introduced a system wherein the policy interest rate will be re-evaluated eight times throughout the year on fixed dates. The most recent one was July 11, 2018.
How Does a Hike Affect Canadians?
The overnight rate affects the interest that retail banks have to pay for short term loans. This means that consumers will feel the hike through mortgages, lines of credit, and savings accounts. Fixed rate debts will not be affected, but variable rate debts will increase. Those with variable rate car loans, student loans, or credit cards may notice that they are paying more out of pocket each month than originally intended.
How Can You Protect Yourself?
While this change can seem like a daunting shift, there are a number of things that Canadians can do to protect themselves from spiralling variable rate debt.
- Prioritize your variable rate debt. If you have both fixed and variable rate debt, adjust your budget to pay down the latter.
- Consider converting to fixed rates. If possible, ensure that new loans are fixed rate. In addition, ask your lender whether it’s an option to convert your existing debts to fixed rate. Before you make drastic changes, crunch your numbers to make sure that this will actually help in the long run.
- Stress test your finances. This year has shown a pattern of increasing interest rates, so try out a some calculations to see how your variable rate debt would affect your ability to pay.
As our economy improves, overnight rate hikes are a reality. Don’t let these changes throw off your financial future. A little bit of preparation can go a long way. Here at Source Mortgage, we can help you find the best rate, fixed or variable, for your unique situation. Call us today at 403-341-7800.