How Will You Be Affected By Rising Interest Rates?
In July, The Bank of Canada raised its overnight lending rate for the first time in seven years, and there is the possibility of another rate hike in October. How do these rate increases affect you? Let’s take a look.
Increased Cost of Borrowing
If you borrow any money at a variable rate, the interest amount you pay goes up. Anyone with variable rate mortgages, loans or lines of credit would have noticed this increase last month, as banks are quick to raise the rates they charge for borrowing when the Bank of Canada increases rates.
Most credit cards are fixed rate, and already quite high, so these tend not to change with Bank of Canada increases. Car loans also tend to be at fixed rates. If you have a fixed rate mortgage, you won’t notice a difference until the next time you have to renew it. Unless rates have dropped again by then, you will be paying more for your mortgage next round.
The Housing Market
Increased costs of borrowing often cool housing markets, because they sometimes price people out of the market. However, interest rates are not the only factors affecting homebuyers. If you are looking to buy or sell a home, pay attention to a possible rate increase this fall.
The Dollar and Buying Power
The Canadian dollar usually rises against other currencies when interest rates rise, at least in the short term. This means you will likely be better off when you make shopping treks to the U.S. Otherwise, interest rate increases tend to increase prices for consumers at home. Businesses that borrow to fund or expand parts of their operations will also be paying higher rates, meaning their rates of production tend to increase. When this happens, prices go up.
Savings Vehicles & Investments
One good thing you might expect with increased rates is a corresponding increase in savings account and GIC rates, but this isn’t usually the case. Banks are quick to increase lending rates, but are much slower to increase the rates they pay out to savers. With this last interest rate increase, most savers saw no improvement to their GIC and savings account rates at all.
Your investment portfolio may also be affected (either positively or negatively, depending on how you are invested) and you should review with your investment professional how higher rates may affect your bottom line.
Interest rate increases affect you in multiple ways, even if you don’t notice them. So it’s a good idea to pay attention to rate changes when they happen. If you have questions about your specific situation, I’d love to chat.