How the Bank of Canada’s interest rate hike affects your wallet
As widely anticipated, the Bank of Canada raised its key interest rate 0.75 percent today, up from 0.5 percent. It was the first increase since September 2010, and most economists expect a second hike of ¼ of a percentage point in October.
The Bank of Canada’s move affects a broad range of interest rates, from mortgages to lines of credit, setting the stage for higher borrowing costs across Canada.
The Bank of Canada’s announcement affects both fixed-rate and variable-rate mortgages.
Fixed-rate mortgages:
- Payments for current homeowners stay the same. As the name implies, the interest rate on this type of mortgage is fixed. Regardless of what the central bank does, your rate won’t change until your mortgage comes up for renewal.
- Higher rates at mortgage renewal. When your mortgage term is up, you will probably face a higher interest rate at renewal. The Bank of Canada’s rate hike is one of several that have been pushing up fixed rates on new mortgages. This will affect mortgage refinancing as well. Still, keep in mind that if you have a five-year mortgage that will be up for renewal soon, today’s rates might be lower than the rate you locked into five year ago.
- Higher rates for prospective homebuyers. Generally speaking, an interest rate increase by the central bank puts pressure on fixed rates to rise as well. If the Bank of Canada keeps hiking rates over the next year and a half, as it is expected to do, you can count on higher mortgage rates. However, when an interest rate move is widely anticipated, fixed-rates generally adjust ahead of the central bank’s announcement. According to some analysts, fixed rates on Canadian mortgages have already absorbed today’s move, for example. Still, rates will continue to climb if the Bank of Canada opts for another increase this fall.
Variable-rate mortgages:
- Your payments are going up. A variable rate moves up or down along with the general level of interest rates in the economy. Today’s Bank of Canada hike means your mortgage payments are going to go up. Usually, banks adjust their variable rates within days or even hours of the central bank’s announcement.
- Does it make sense to switch to a fixed rate? Variable-rate mortgages come with the option of switching to a fixed rate during the term of the loan. Doing so might buy you peace of mind if the thought of raising interest rates keeps you up at night. But conversion rates are usually higher than the interest rate lenders advertise on new fixed-rate mortgages. Some lenders also demand that borrowers locking in sign up for a five-year term, no matter what the remaining term of their current loan is. If you do the math, you might find that you are better off sticking with your variable rate.
Home equity lines of credit:
- Your payments are probably going up. Most home equity lines of credit have variable interest rates. While today’s rate hike was small, a series of increases could prove problematic for overstretched borrowers who opted for home equity lines of credit that allow for interest-only payments. If you are worried about bigger debt repayments, you might want to switch to a fixed rate.
Other lines of credit:
- Your payments are probably going up. Lines of credit in general often carry variable rates. Even though today’s rate hike was small, you might feel the pinch if you have an unsecured line of credit (i.e. not backed up by an asset such as a home or a car), which generally has a higher interest rate of 5 to 7 percent.
Car loans:
- Your payments will likely stay the same. Most auto loans have fixed payments, whether your rate is fixed or variable.
- Your loan repayment period will stretch out if you have a variable rate. Your payments stay the same, but it will take you longer to pay off your loan.
If you are concerned about the Bank of Canada’s Interest Rate Hike and the current Mortgage Rates, and how it will affect your current mortgage, or future home purchase contact Client First Mortgage Solutions today!
Original Article – Global News
