The Bank of Canada’s latest interest rate hike means higher borrowing costs for consumers with variable-rate mortgages, loans or lines of credit. But it’s also good news for savers and future homeowners.
The central bank’s decision to increase its benchmark interest rate to 1.5% on Wednesday prompted all of Canada’s Big Six banks to raise their prime rates a quarter of a percentage point to 3.70%, effective today— and thereby passing the rate increase along to clients.
Those with variable-rate mortgages will now face higher interest payments, a concern for many Canadian households already saddled with hefty debt loads, said Samantha Brookes, CEO of Mortgages of Canada. “Increasing rates just really limit how much they have available to them on a monthly basis,” she said.
Though the increase in banks’ prime rates raises the cost of borrowing for clients with variable-rate loans, people with money socked away in savings accounts and guaranteed investment certificates will benefit, said Scott Hannah, president and chief executive of Credit Counselling Society.
“It helps seniors who depend on interest income to help fund their retirement expenses,” he said. “And the rate hikes are keeping Canadians focused on the need to curb their appetite for debt and pay down the debt they have.”
Higher interest rates, along with stricter mortgage rules, have also helped cool down the country’s real estate markets, helping future homeowners, Hannah said. It’s unwelcome news, however, for those looking to renew mortgages this year, he added.
Overall, the impact of the latest rate hike will be modest for consumers, said Meny Grauman, an analyst with Cormark Securities Inc. The rate hike is in reaction to a healthy Canadian economy, which is beneficial, he added.
Rates are slowly on the way up, but remain relatively low historically, Grauman added. “On balance, it’s still probably a positive for the average household, for the average business.”
Interest rates and credit cards
Though banks’ prime rates don’t directly affect credit card rates, clients with credit card debt should be aware of the cards’ often crippling rates. It’s an important point, since many Canadians carry consumer debt.
Credit agency TransUnion said earlier this month that average non-mortgage debt stood at $29,312 per Canadian, including an average credit card balance of $4,154—a sum carried by about half of Canadians who fail to pay their cards off in full each month. Equifax Canada reports that average non-mortgage debt has risen 2.9% in the last year. (Equifax’s figure for average non-mortgage debt is lower, at $22,775.)
For clients drowning in maxed-out credit cards or otherwise attempting to juggle debt, consolidation loans are potentially attractive because they provide a single lower rate of interest.
However, Hannah recommends waiting until clients establish a track record of sticking with their budgets, which could take months or years. Too many people get a consolidated loan only to dip into credit cards before it’s paid off, due to an emergency or perceived need, so the track record is important, said Hannah.
“It takes a while if you’ve never done it before, to use a budget. You’re going to make mistakes,” he added.
Establishing a proven budget and payment plan could also make it easier to get that consolidated loan once the groundwork has been laid.
Once ready for a consolidated loan, clients should be wary of online loans from less established lenders. While these appear to offer a seemingly cheaper interest rate, clients should carefully review the terms, said Hannah. Actual rates can be much higher than those advertised, and can carry hefty penalties for things like late payments.
Another way to cut interest payments is transferring balances to a low-interest credit card, but doing so often triggers a balance transfer charge.
Further, the approach relies on credit cards, which Hannah says people need to give up altogether until they get out of debt.