How it Affects Your Wallet: The Bank of Canada Interest Rate | Refresh Financial

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How it Affects Your Wallet: The Bank of Canada Interest Rate

You may have heard in passing conversation with friends, coworkers, or heard on the news that the Bank of Canada Interest Rate was raised to 1.25% earlier this year. While millions of Canadians don’t keep up with this sort of news, they are definitely feeling it in their wallets. According to the Huffington Post, one-third of the Canadian population has reported to have been already affected by this recent interest rate hike.

With some experts projecting nearly 5 interest rate hikes in the next 2 years, it’s worth your while to see how those changes might affect you.

In today’s article, we’re going to discuss any at all impacts this and future rate hikes or decreases would impact your wallet.

How The Bank of Canada Interest Rate Affects Canadians

When the Bank of Canada raises its interest rates, it will not affect Canadians with fixed rate debts. But the rate hike might lead to lenders increasing the prime interest rate that Canadians receive for their loans, which in turn leads to an increase in variable interest rates. Some forms of debt that might have variable rates include mortgages, lines of credit, car loans, student loans, and credit cards.

Essentially, if you are a consumer with a variable-rate loan, an interest rate hike will result in you paying more each month. According to an Ipos survey, the January interest rate hike had Canadians seeing $149 less in their savings each month.

The benefit of a variable-rate mortgage, for instance, is how they start off lower than fixed-rate mortgages. The potential risk involved is that the Bank of Canada raises the interest rate so much, that it costs you much more of the course of your loan. Fixed-rate lock you in at a higher interest rate in the short term, but will remain the same throughout the agreed upon term, providing you added comfort.

Related Article: Deciding between a fixed or a variable mortgage? We discuss the advantages and disadvantages of each option. Read the article here.

Preparing for Interest Rate Hikes

Here is some of the best course of action you can take in order to protect yourself from raising interest rates.

Forecast the impact of another hike

We’ve talked in the past about the Mortgage Stress test put into place by the Canadian government in 2016 It’s always good practice to conduct your own stress tests to anticipate how you can cope with higher monthly payments. Take your existing monthly expenses and tack on an extra $100 or $150 to your mortgage bills to see how you would fare.

Prioritizing variable debts

If you are carrying both fixed and variable debts, aggressively paying down variable debts can soften the blow of a rate increase. It’s important to note that this strategy is best for those whose fixed rate debt doesn’t carry a high-interest.

Consider converting to a fixed rate

If your 5-year variable rate is coming to an end and you find yourself worried about impending rate hikes, it may be wise to consider converting to a fixed rate. You may pay a higher rate than you would a variable, but there is comfort in having your interest rate remain the same if the rates were to increase drastically.

Stay informed

The best way to prepare yourself is to stay up to date with the news. There are current events like the possible demise of NAFTA that could lead to a significant interest rate hike. By stay up to date on these events and get ready to take action if you can. It could end up saving you thousands of dollars over the course of your loans.

Hopefully, this article will help you be prepared for the next Bank of Canada Interest Rate announcement. For more helpful tips on how you can increase your credit score, save money, and give yourself the best opportunity to gain your financial freedom, stay tuned to Refresh Financial’s Blog.


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