It’s all but confirmed that the Bank of Canada will raise its key interest rate later this week. That prospect has many Canadians on edge, unsure of what to expect.
A report from RBC last week forecast that if interest rates were to rise one percentage point over the next year, it would mean households would end up paying an additional two cents for every dollar of income to serving debt. That amounts to the average Canadian household (with a median income of $78,870) paying about $130 more each month, Global News reports.
“Everyone needs to keep some perspective here,” says Laird. “We’re moving one quarter of a point [based on the anticipated rate change] from all-time lows. I find there’s some anxiety about this move and what it’s going to mean, but really, it’s a moderate move.”
If you’re still unsure what you should do to prepare for the rate hike, or don’t know what it will mean for you, Laird breaks down three areas that will be affected by the interest change, and how to prepare yourself.
This is the most obvious and direct area where Canadians will see an impact on their budgeting, and may already be feeling the pinch: four of the Big 5 banks have already raised some of their mortgage rates in anticipation of the rate hike.
The interest rate hike is anticipated to be one-quarter percentage (25 basis points). BMO increased both its five year fixed and five year “smart fixed” mortgages by 20 points on Friday, to 2.89 and 2.79 per cent respectively, and its three-year mortgage rate by 10 points to 2.64 per cent. CIBC raised rates between five and 15 basis points on Saturday. RBC increased its two, three and five-year term fixed rates by 20 basis points earlier last week, and TD has also raised some of its mortgage rates.
“If you’re an existing customer and have a variable rate, now’s an interesting time to consider converting a variable rate into a fixed rate,” says Laird. “If we had a crystal ball and knew that we were in for rates rising consistently by 50 basis points a quarter, the better strategy would be to lock into a fixed rate today. If you’re in a variable rate, your rate goes up whenever the interest rate rises.”
If you’re currently in the market for a new home and a mortgage, Laird encourages consumers to go out and get pre-approved for a mortgage now. Pre-approvals hold the rates for four months (or 120 days), so if you’re looking to a bank that hasn’t raised its rates yet, now’s the time to book a meeting with a mortgage specialist.
Guaranteed investment certificates (GICs) will also be affected by the anticipated rate increase. Laird says they’ll be re-priced after the rate increase takes effect, although likely not right away. Banks may not decide to change the fixed rate of return on a GIC, but it could result in better returns in the long run.
“I think that we should expect to see a fairly correlated raise in the interest you can earn from a GIC across the board,” says Laird.
Laird advises anyone who was in the market to purchase GICs to hold off for now, as you can likely get a better rate in two to three weeks.
3. High-interest savings accounts
Unfortunately, this is likely to be the area that will have change come the slowest.
“It’s been a tough couple of years if you’re a saver looking for a good return without a lot of risk associated with it,” says Laird.
While there is a chance the banks will increase interest on savings accounts, there isn’t a history of banks passing along full savings from interest rate increases or decreases on to consumers. When the Bank of Canada dropped rates several years ago by a quarter percentage point, banks only dropped their rates by 0.15, which didn’t amount to as much in the way of savings for mortgage-holders. Increasing savings account rates are even less common, and less likely.
“Banks don’t adjust savings accounts very often,” says Laird. “It’s more driven by marketing and promotions rather than underlying interest rates.”
Laird suggests those looking at high-interest savings accounts to get comfortable, as they’ll have to wait and see if banks adjust their rates following the rate hike announcement. Eventually rates will move, and then consumers can decide whether they want to move their money into an account with the institution offering the best rate.
Now that many of the mortgage rates have been adjusted, the next decision will be whether banks want to adjust their prime rate. Currently, all of the Big 5 banks have their prime rates set to 2.70 per cent. TD posts an additional mortgage prime rate, which is 2.85 per cent. Laird says it will be a matter of waiting to see if all the banks follow TD’s lead and set higher prime rates.
Ultimately, though, Laird stresses that the last thing consumers should be doing right now is panicking. The Bank of Canada generally only raises rates by a quarter per cent at a time, so the anticipated hike is expected to be in line with that. And while the rate is set to increase for the first time in seven years, it’s going up from a historic low.
“Interest rates are low, money is still cheap to borrow, so some perspective should be kept through this rate hike,” said Laird.