How Will Rising Interest Rates Impact your Bottom Line?
Present day interest rates are at jaw dropping historical lows, yet as trends suggest, and as the recent hikes show, this won’t last forever. The Bank of Canada just raised the rate to 1.75% – the highest it’s been in 10 years – and major banks have all raised their prime lending rates from 3.70% to 3.95%.
Bank of Canada governor Stephen Poloz wants Canadians to prepare for the “new normal” of ongoing hikes up to 3%. This is the fifth time the benchmark price has been raised in just over a year. It seems the era of rock-bottom borrowing costs is gradually fading away as the Canadian economy strengthens – the evidence is following the recovery of the 2014-2016 recession in Alberta, and the successful renegotiation of NAFTA. If history is any guide, as US interest rates go up Canadian rates may be going up with them.
If you have a variable rate mortgage, this is the impact (assuming a change in variable rate from 3.7% to 3.95%):
Previous payment: $1,364.71
New payment: $1,398.28
Monthly difference: $33.57
Annual difference: $402.84
Previous payment: $2,711.42
New payment: $2,778.57
Monthly difference: $67.15
Annual difference: $805.80
Previous payment: $4,044.63
New payment: $4,145.35
Monthly difference: $101.00
Annual difference: $1,212,00
Previous payment: $5,377.84
New payment: $5,512.13
Monthly difference: $134.29
Annual difference: $1,611.48
For the 77% of you that have a fixed rate: your household is immune to the hike — for now.
Rising rates will spell tighter affordability for borrowers of all kinds, as it will become more expensive to qualify for and carry a mortgage. The hike, together with the increases to come, will especially be felt by first-time home buyers, who are buying in a housing environment with rates higher than they’ve ever experienced before.
It’s very unlikely that interest rates will ever revert to the double digits that they once were. There’s still much uncertainty in the global economic outlook, and aging populations limit bursts of potential growth that contribute to uncontrollable inflation.
So why does this have to happen? Central banks generally raise interest rates to keep the economy from overheating and generating excessive inflation, since higher borrowing costs tend to moderate economic activity.
More hikes will likely be coming, and it pays to be smart to prepare for them. Know your household expenses and be strategic with your spending and investing.
Make sure you consult with your mortgage broker to understand the potential impact. Want to explore all of your options now or before renewal time? Talk to Angie!
Angie Alvarez- Mortgage Agent
Capital Home Lending