What does an interest rate increase really mean to you?

Today the Bank of Canada announced that it will be raising the interest rate by 0.25%, which now brings the interest rate to 1.25%.  So what does this truly mean to you? A lot depending on your situation and I’ll get into each one of the situations down below. But this rate increase isn’t the first rate increase and it won’t be the last. The Bank of Canada has held the interest rates at all-time lows up until 2017 when it started to increase them. And it has been projected by many analysts that we could see around three interest rate increases in 2018 depending on how the economy & other factors like NAFTA shake out.

Why’s that? Because of the really low interest rates for quite some time, Canadians now have some of the highest debt levels in the world. It was just so cheap to borrow money for just about anything like a mortgage, car loan, etc. The low interest rates were a way the government could drive the economy and overall growth to avoid a recession. However there is always a downside to that and I think we are seeing it with how much debt people have these days.

Interest Rate Increase Pic #1

 

Now, if you’re like Lindsey, you may have yelled, “BORING!” to the universe and continued scrolling through the newspaper for other articles. Interest rates, understandably, can be an incredibly boring and confusing topic. However, if you have a credit card, line of credit or mortgage, then you definitely need to pay attention. We’ve broken down how an interest rate increase will affect your money:

 

Mortgage

This is probably where you will see the biggest impact and why people always look first when any kind of rate change happens. Mainly because of the size of the debt and how even the smallest of changes can have a big impact for anyone with a variable rate mortgage. Anyone with a fixed rate mortgage won’t be affected till their mortgage is up for renewal.

I’ve mapped out two scenarios to illustrate the potential impact it could have on someone that has a variable rate mortgage. For instance, the person with a $350k Mortgage Principle will see almost a $50 per month increase with every 0.25% rate increase by the Bank of Canada. That could equate to over $500 annually. Now let’s assume that the Bank of Canada indeed does increase the rate 3 times next year. That could mean an extra $140 per month in mortgage payments. Now here’s the real kicker… that is all interest and now of that extra cash you pay goes towards the principle of your mortgage.

Now looking at our second scenario of a mortgage of $500k… we see the same rate increase means around an extra $66 per month. If the Bank of Canada does increase it 3 times, that’s an extra $200 a month and almost $2,400 for the year!!! There goes that vacation you were planning for.

Interest Rate Increase Ex #1

Student Loans

If you are carrying a government student loan in Canada, they are all on a variable basis and will be impacted with any increase in the prime rate. So that’s the bad news. The good news is that the increase won’t be as bad as your student loan is probably much smaller than any mortgage you might have.

On average you would only see just over an extra $1 per month for every $10k in student loans you have per increase. So an extra $14 per year for that $10k loan per rate increases. If you had a $30k student loan, each rate increase will only impact you about $3.50 per month and around $42 for the year.

Overall not ideal that your payments will be going up but it won’t break the bank and won’t cost you that trip you were planning.

One thing to note though is that you can actually apply for interest relief to get rid of all interest payments altogether. Definitely worth checking out and applying to see if you qualify through the Repayment Assistance Plan (RAP).

Interest Rate Increase Ex #2

Line of Credit, Home Equity Line of Credit & Credit Cards

Any kind of Line of Credit or Credit Cards are all based on a variable basis and will also go up with any rate increase from the Bank of Canada. It would be very similar figures to the above Student Loan section, so keep a look out for those potential cost increases as well.

In regards to the Credit Cards, no different than before but you can avoid all interest by similar making your full payment each month. Even if it is with a line of credit at a much lower interest rate, that will help you potentially save hundreds of dollars.

 

Overall this rate increase, and any future ones, can have quite a bit impact to your monthly finances. So work with great professionals around you to help you figure out what to do. If you have a variable mortgage and are worried about these rate increases, talk to a mortgage broker about your options. If you aren’t sure what to do, drop us a line or comment and maybe we can better direct you.

 

 

*Graph sourced from CBC: http://www.cbc.ca/news/business/oecd-debt-1.4415860

Mortgage calculations were based on a 25 year amortization

Feature photo courtesy of: ratehub.ca

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