What Rising Interest Rates Mean For You
Okay, so there are hundreds of articles out there about this topic, especially since The Bank of Canada just increased the overnight rate. This post is going to be super simple, and in language everybody can understand.
On Wednesday, July 12, The Bank of Canada increased the overnight rate for the first time in seven years. The overnight rate (or target rate, benchmark rate, key rate) is the interest rate at which major financial institutions lend money to each other in one day periods, or “overnight”. The reason banks do this is beyond the scope of this article.
Why should you care?
When The Bank of Canada raises the overnight rate, banks increase their own “benchmark” rate they use to lend to you, which is called the prime rate. The prime rate is what all variable-rate borrowing products are linked to. This includes variable-rate mortgages, lines of credit, and student loans.
What to do if you have a variable-rate mortgage
First of all, don’t panic. You do have options, and you are not going to end up on the street. In Canada, 29% of mortgages are variable-rate; you are not alone. The two options you have are:
- Lock in at a fixed rate. Most lenders will allow you to lock in your mortgage at a fixed rate, but it may involve some penalties and other charges.
- Keep your mortgage variable. Canada’s economists do not see any drastic rate hikes in the near future. If The Bank of Canada raised rates too high too quickly, it could cripple our economy. If you have some money to spare in your budget, you should be okay. My co-worker has a variable-rate mortgage, and his payment went up $20/month. Not a huge deal, but crunch your numbers and see what makes sense for you.
What to do if you have a line of credit
Most unsecured Lines of Credit and Home Equity Lines of Credit have variable rates. These types of borrowing products can be dangerous if not used correctly. First of all, your minimum payment will go up; but you should be paying more than the minimum payment, right? Rates will continue to rise as The Bank of Canada attempts to control our economic growth. My advice would be to pay down the line of credit as quickly as possible.
What to do if you have student loans
You have a six-month grace period after you graduate before you need to start paying your loans back, but in those six months, interest is accruing. So, if you can (I know it is hard), start paying them back as soon as possible.
When you pay back a student loan, you have the choice of a fixed rate or variable rate. If you choose a variable rate, pay it back as aggressively as possible.
Listen, I am not trying to fear-monger. I just want everyone to know how rising interest rates will change your financial picture. This is a wake-up call to everyone with variable-rate debt. If you were thinking of taking out a line of credit to renovate your bathroom, now might not be the best time. Sure rates are still historically low, but this is only one of many interest rate increases to come.