Like it or not, higher interest rates are here. In what was perhaps the most anticipated rate hike in history, the Bank of Canada hiked the overnight lending rate in July. The banks followed suit and hiked their prime rate.
This rate hike was largely expected, but what wasn’t expected was September’s rate hike. Most economists were predicting an October rate hike. That changed when the latest GDP numbers came out. Our GDP grew at an annualized basis of 4.5 percent on strong consumer spending. That puts us at the top of the pack in terms of growth in the G7 countries.
Is this the beginning of a trend of higher interest rates or is this just Bank of Canada Governor Stephen Poloz bringing us back to the “new normal”? Back in 2015, Poloz cut the overnight lending rate twice, bringing it down from 1 percent to 0.5 percent. The past couple rate hikes bring us back to 1 percent and offer us some buffer for the next economic shock. Is Poloz going to stop here or could we see three or four 25 basis rate hikes in 2018 as some economists are predicting?
Unfortunately, we don’t have a crystal ball, but it’s been quite a while – 7 years to be precise – since the last rake hike. Let’s look at what higher interest rates means for average Canadian families.
If you have a variable rate mortgage, you’ll feel the immediate impact from higher interest rates. Not surprisingly, the big banks followed suit and raised their prime rate 25 basis points from 2.95 percent to 3.20 percent. Although your mortgage payments likely won’t increase, more of your money will go toward interest and less towards principal, stretching out your amortization period (the length of time it takes for you to pay off your mortgage). If you want to be mortgage-free in the same time frame, you’ll need to up your mortgage payment (SA Capital can help figure ways to free up your cash flow without necessarily downsizing your lifestyle). With rates rising, now might be the time to consider locking in to a fixed rate. (Again, SA Capital can help you crunch the numbers and make sure that makes sense.)
For those with fixed rate mortgages, you can breathe a sigh of relief – at least for now. Since you’re locked in at your mortgage rate for your mortgage term, you won’t feel the impact right away. However, if your mortgage is coming up for renewal, you’ll face higher rates. Should you go fixed or variable? If higher interest rates keep you up at night, it probably makes sense to go fixed, but we’re always here to help you with this key decision.
Although a mortgage is likely your biggest debt, that’s not the only debt that’s affected by a hike in interest rates. If you have a Home equity lines of credit, line of credit or car loan, you’re likely impacted. (Floating rate student loans and some credit cards are even affected). Again, that means more of your money is going toward interest and less toward principal.
Savings Accounts and GICs
If there’s a silver lining to higher rates it’s that it rewards savers. Savers should start to see a better yield. Expect savings account rates and interest rates on GICs to go up.
Whether you’re saving for a short-term or long-term goal, there’s no time like the present to start stashing money aside. We’re happy to meet with you and help you come up with a savings plan to meet your financial goals.