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The odds that the Bank of Canada will increase its key interest rate by 0.25 per cent today are overwhelming, as far as financial markets are concerned.
That rate, known in banking parlance as the “overnight rate,” determines the rate at which banks lend money to each other on a regular basis. In practice, changes in the overnight rate get passed on to consumers through corresponding changes in interest rates on different financial products.
Here’s how the expected hike could filter down through the kinds of loans held by Canadians:
Canadians with variable-rate mortgages, also known as adjustable-rate mortgages, will feel any increase in the overnight rate.
For homeowners who have locked in a fixed-rate mortgage, nothing will change until the fixed term ends and it’s time to renew. Some of Canada’s big banks have already started charging more for their five-year fixed-rate loans in anticipation of a rate hike.
That said, it’s possible that some fixed-rate mortgage holders who renew in the near future could actually lock in a new fixed-rate mortgage at a lower interest rate than they signed up for five years ago, according to Preet Banerjee, author of Stop Over-Thinking Your Money!.
Those borrowers “may actually still be renewing into a lower rate, because even though rates are going up, they’re still lower than when a lot of people got their fixed-rate mortgage,” Banerjee said.
Canadians who use their homes as a source of cash by borrowing against their home equity could quickly owe more after a rise in interest rates, as those loans are frequently variable-rate. Read more about the impact of interest rates on HELOCs:
Credit cards generally charge interest at a fixed rate, according to Laurie Campbell, CEO of Credit Canada Debt Solutions. Although that fixed rate can be quite high, it won’t increase with the Bank of Canada’s overnight rate.
That’s no reason to be complacent about credit card debt in a rising interest rate environment, suggested Campbell. If consumers start missing regular credit card payments (perhaps because the cost of making their other debt payments has increased) some credit cards will actually raise the interest rate owed on the outstanding balance.
“So you might be sitting at 19 per cent, and then if you start missing payments they might increase your rate to 24 per cent,” said Campbell. “A lot of people don’t realize that.”
After variable-rate mortgages, Canadian borrowers will feel the expected interest rate hike most heavily in their lines of credit, said CIBC deputy chief economist Benjamin Tal.
“That’s where you feel the pain, because they’re linked to the prime rate, and the prime rate probably will rise when the Bank of Canada starts raising interest rates.”
Interest rates on lines of credit “indeed could go up with the [Bank of Canada’s] rate, so people should take a look to make sure what that impact could be on them and how they’re going to pay that off,” advised Campbell.
Government student loans don’t require payment until six months after leaving school, although they do accrue interest during that period. The rates can be be either fixed or floating.
Either way, Canadians who are about to start repaying their student loans will be affected if the Bank of Canada hikes rates, according to Campbell. Floating-rate student borrowers will see their interest rate go up immediately, while fixed-rate borrowers will have to lock in their payments at a higher interest rate than they would have.
Auto loans tend to be fixed-rate, according to Michael Hatch, chief economist with the Canadian Automobile Dealers Association, although some Canadian banks offer variable-rate car financing.
If interest rates continue to increase, Hatch said, that could make monthly payments for future auto loans more expensive and affect the kinds of cars Canadians choose to buy.
Higher interest rates could benefit Canadian savers: Recent history suggests an increase to the overnight rate will translate into “a corresponding increase” in interest earned from savings accounts, according to Tal.
But the interest rates on savings accounts are still quite low, said Banerjee. He doubts an increase in rates will motivate Canadians to increase their savings by using traditional savings accounts.
The biggest change for Canadian consumers after an interest rate hike, Banerjee said, could be a shift in sentiment that alters the way we think about spending and borrowing.
“We’ve had now an entire generation of financial consumers who have grown up in a progressively falling interest rate environment. And for them, carrying a lot of debt has become the new normal — they’ve never known anything else,” said Banerjee.
“So because interest rates have fallen, and because borrowing money has become normalized, this could represent a real problem for them because they’ve gotten used to living month-to-month, paycheque-to-paycheque as a lot of people do, with very low costs of interest.”