Five things to know about the Bank of Canada’s interest rate hike
Bank of Canada touts ?good news? rate hike
Joanne Lee-Young
The Vancouver Sun
The Bank of Canada raised its benchmark interest rate for the first time in seven years on Wednesday, moving it 25 basis points from 0.5 per cent to 0.75 per cent. The country’s five largest banks all followed, hiking their prime rates from 2.7 per cent to 2.95 per cent, which will increase the cost of borrowing when it comes to everything from variable rate mortgages to lines of credit and other loans.
Here are five things to consider:
IN THEORY
According to Ratehub.com, around 66 per cent of all mortgages held by Canadians have a five-year fixed term, meaning borrowers commit to a rate, lender and certain conditions set out for that time period.
The rest are variable rate mortgages, which usually have lower rates than fixed ones, but fluctuate with the prime, which is now moving up.
Some prudent homeowners have been preparing for this rate hike, often by paying more than they need each month to create a financial cushion for themselves.
IN THE MOST EXPENSIVE REAL ESTATE MARKET
But others — especially those who have had to stretch their budgets and massage the interest rate math in order to get into Canada’s most expensive real estate market — will feel the pinch.
Some are carrying significant mortgages, sometimes with as little as five or 10 per cent down payment. The telling thing is the loan-to-income ratio. With average home prices in Vancouver having increased by some 40 per cent last year, and incomes staying flat, there are more mortgages with higher, riskier ratios, even though there are new lending requirements that have dampened demand for those type of mortgages.
Some borrowers who already have little wiggle room left to cover costs outside of housing will struggle to keep up when rates increase the cost of their monthly mortgage payments.
ATM MACHINE
Soaring home prices have made homeowners feel wealthier and they have been borrowing against the hefty paper values of their homes for everything from vacations to renovations. The cost of using their homes like an ATM machine through lines of credit will also go up with the prime rate increase, and this could chill some discretionary spending.
ON THE POSITIVE SIDE
In what’s seen as a sign of the economy’s health, the Canadian dollar moved to near 79 cents US after the rate hike, closing above 78 cents US for the first time since August 2016.
CREDIT COUNSELLORS SAY
This quarter point rate hike may not make a big difference to many people right now, but the message it sends should. It’s the beginning of what could be several more increases in the next year.
“As much as possible, people should pay down debt. We all have debt, whether it’s $500 on a credit card or thousands on a line of credit. Develop a plan that isn’t about making the minimum payment, but get it paid off, whether it’s a plan for four or five years or ten years,” says Gary Tymoschuk, New Westminster-based vice-president of the Credit Counselling Society.
“If you are already going from paycheque to paycheque, with nothing to spare, and then you have to take your car into the shop and spend $500 and it throws your financial situation out of whack, then you will feel this (rate) hike and need to tweak your spending.”
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