If you’re one of the many Canadians struggling to pay off student loans, mortgage payments, credit card debt, and more, then the interest rates are something you should probably be concerned about. Statistics Canada recently reported that the increase in interest rate has gone by 0.25% to 1.5%. And it’s true — a one percentage point rise in interest rates can add significant money to your monthly bill. You might be thinking that does a decrease in interest rates increase investment? It definitely does. However, along with this rise came an increase in the amount of debt Canadians had to pay each month.
When interest rates rise, people feel pressure to change their spending habits. So how will the increase in interest rates impact individuals and households? And what are the best steps to take when dealing with financial hardship? Here at Yogi & Associates, we want to help you look past those headline numbers and focus on the effect this will have on your debt and spending. So whether you’re in the middle of a financial crisis, wondering how high-interest rates will affect your budget, or want to know more about savings, have a look at this article!
Increase In Interest Rates in Canada: Your Complete Guide
1. What is meant by Interest Rate?
Interest rates represent the return you must make on a loan or deposit to receive your principal back from the lender. This is so that if you choose to pay off your debt sooner than expected, the lender will receive more money than required for its services.
Example: When you apply for a mortgage, you are borrowing money from the lender rather than paying them directly. The lender charges interest on the amount borrowed, usually between 1 and 12 percent, depending on your credit score and the term length you have chosen for your mortgage.
2. How Much Has Interest Gone Up?
The Bank of Canada announced that it would increase its prime interest rate from 0.5% to 1%. For example, many prime lenders, such as banks, increased their prime interest rates from 2.70% to 3.20%.
The increase in interest rates is not good for borrowers in Canada. This is because when the interest rate increases, it makes it more expensive for them to borrow money. And as a result of this, people will have to pay more on their debts. The increase in interest rates is expected to have a big impact on borrowers, especially those with variable-rate mortgages or lines of credit.
3. What Does Increase Interest In Rates Mean for Canadian Debt?
A rise in interest rates is bad news for anyone who uses debt to finance their spending. Here are some specific debts that can be affected by higher interest rates in Canada:
Higher interest rates can lead to higher borrowing costs for many Canadians. With an interest rate hike, Canadians with variable mortgages will see their interest rates increase to offset the higher cost of borrowing money. This could translate into higher payments for those carrying a balance on their home loan.
For example, if you take out a mortgage with a fixed rate and the Bank of Canada raises its prime rate from 2% to 3%, your monthly payments will go up by about $50 per month. Interest rate hikes also impact:
- Fixed mortgage rates upon renewal
- Mortgage qualification and stress test
- Required down payment
- Home prices
“Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s happening to the companies in which you’ve invested” -Peter Lynch
If you want to know more information about mortgage rates, please visit our blog Fixed-Rate Mortgage in Canada: A Brief Overview
2. Credit Cards and Car Loans
Increased interest rates can lead to increased credit card debt and car loans in Canada. In addition, the increase in interest rates will increase the cost of borrowing money, which will affect your ability to purchase goods and services. When borrowing money gets more expensive, it’s harder to afford the necessary items. This, in turn, leads to increased spending, as well as increased credit card debt and car loans.
Example: If your interest rate for a car loan was 5% before, it could jump to as much as 8%, which would mean you’re paying more in total than ever before.
3. Debt Consolidation Loans
We’ve been hearing a lot about interest rates lately, and they’re expected to continue their upward trend. This means that if you have a debt consolidation loan in Canada, you’ll pay more interest on it over time. That’s because when you take out a debt consolidation loan, your monthly payment is based on the amount of debt you owe and how long it will take to pay off that debt.
Example: If you have a debt consolidation loan with a variable interest rate, your minimum payment will increase when the prime rate increases, whereas with a fixed rate it won’t. However, anyone looking for a debt consolidation loan with a fixed rate will likely pay more in interest when the prime rate increases.
4. How Does Increase In Interest Rate Impact First-Time Homebuyers?
Homeownership has been a key component of the Canadian dream for generations. But how does a rise in interest rates affect the ability of first-time homebuyers to purchase a home?
Interest rate hikes make it harder for first-time homebuyers make it harder to qualify for a mortgage. When interest rates go up, applicants need to pass a higher stress test to secure a loan. Due o increase in interest rates, first-time homebuyers cannot afford the home they want. The cost of living goes up when interest rates go up, so first-time buyers have more competition for their limited cash supply.
So what does this mean for Canadians? It means that homeownership becomes less attainable when interest rates rise. And since there are limited options for purchasing a home in Canada these days (especially outside of major cities like Toronto), many people are forced to choose alternatives such as renting or living with family members.
5. Benefits of Increase In Interest Rates
Higher Interest Means Higher Returns on Savings Accounts
Higher interest rates mean higher returns for savers, so their savings will grow faster than before.
Example: If you put $100 in a savings account that pays 2 percent interest, you’ll have $102 after one year and $104 after two years. With a 1 percent rate, you’ll have $105 after one year and $108 after two years — an extra $2 per month.
Housing Prices Decrease with Higher Interest Rates
An inflated housing market causes skyrocketing prices, which makes it difficult for many first-time homebuyers to achieve homeownership. Canadians pay more for their mortgages and other loans. This is because lenders have to charge higher interest rates on their loans in order to match the higher cost of funds. Thus, with higher stress test thresholds and less incentive to borrow for a mortgage, only a few people will bid up housing prices, thus cooling the market.
6. How to Manage Debt When There is An Increase in Interest Rates?
If you’re thinking about how to manage debt when there is an increase in interest rates , there are four important steps:
- Understand the difference between fixed and variable-rate mortgages.
- Get a “fresh” look at your budget.
- Prepare for a possible decrease in monthly income.
- Consider setting aside some money for savings and/or retirement in case of an increase in interest rates.
People also ask that does a decrease in interest rate increase investment? Definitely, the lowering rates makes borrowing money cheaper. This encourages consumer and business spending and investment, and can boost asset prices.If you’re one of the many Canadians grappling with higher interest rates, you may wonder how to deal with it. To conclude, the increased interest rates will significantly impact your overall financial situation. You are not alone in feeling these pressures; most Canadians are experiencing the same thing.
With the help of Yogi & Associates, you can start to make changes that can assist you with overcoming any financial challenges you may be facing. We understand the economic times we live in, and our priority is to help you achieve your financial goals. So we’re here for you if you need peace of mind or advice on what best to do next regarding your credit score. To get professional advice, you can easily find Yogi & Associates in Mississauga or contact us online.