The Bank of Canada has now upped its overnight interest rate from 0.25 percentage points to 0.75 percent. As a result, this change may affect the various loans held by Canadians. Here's what you need to know about the interest rate increase.
What Is It?
The overnight market rate is the rate at which banks loan money to each other on a continual basis through the large-value transfer system. Because the bank needs to settle any large transactions each day, it borrows from the overnight market (this rate determines what banks lend to one another regularly). When the overnight rate changes, the increase is then filtered down from the bank to the interest rates of Canadian loan holders.
Why Is There a Rate Increase?
While no one likes the idea of a rate increase, the recent changes are actually a good thing as they're a direct result of a rebounding economy - with balance returning to the housing market in particular. In addition to this hike, the Canadian dollar has also gone up. In short, lower overnight rates have done their job and the Canadian economy is performing well.
What Are The Changes?
Here are the most common types of loans that can expect to see changes as a result of the rate increase.
This type of loan is most commonly seen with a fixed interest which means most card holders won't see a change. However, in a rate raising environment, it's possible the bank may charge you a higher rate if you miss multiple payments.
Government issued student loans don’t need to be paid for the first six months after leaving school, but they do collect interest during this time. Student loans can be either fixed or variable and will most likely be affected by the rate increase. Floating rate borrowers will see their rates go up almost instantly where fixed rate borrowers resettling their loans will have to pay more.
This type of loan tends to be at a fixed rate, although there are a few banks that offer variable rate car loans. If rates continue to increase, monthly payments for future car loans could become more expensive and have a greater impact on what vehicles consumers can afford to buy.
How Will These Changes Affect Home Buyers?
Depending on the types of loans you have, the rate increase will have varying effects on every home buyer. Let’s go through the changes in each loan type.
If you have a variable rate mortgage, you'll see the increase right away with the change in overnight rate. Conversely, if you have a fixed rate mortgage, your rate will not be impacted until your term expires and you need to renew. Most of Canada’s prominent banks are already charging more for a five-year fixed rate mortgage.
However, if you have a fixed rate mortgage and are looking to renew there's a chance you may actually save some money as the new rate may be lower than the one you were locked into initially.
HELOC’s and Lines of Credit
Now that interest rates are higher, those with a HELOC will owe more as these types of loans are a variable rate. Lines of credit are the most likely to feel the increase because they match the bank's interest rate.
As mentioned above, no one likes the idea of increasing interest rates. However, the changes are a positive reflection on a rebounding economy and stabilizing housing market. If you're concerned about managing your debt, be sure to talk to your bank regarding your repayment options.