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How Will Rising Interest Rates Affect You?

Interest rates are going up, and fast, as the Bank of Canada and other central banks try to slow rising inflation. In mid-April, Canada’s inflation rate was 6.7 per cent, a 30-year high. The Bank of Canada’s target rate for inflation is two per cent.

On April 13, the Bank of Canada raised its benchmark interest rate by half a percentage point (otherwise known as 50 basis points) to one per cent. Typically, rate increases or decreases are 25 basis points – this increase was the Bank’s biggest since May 2000.

Tiff Macklem, the Governor of the Bank of Canada, has said the country “needs higher interest rates” to keep prices from rising too quickly. Macklem, who had already announced a quarter point increase in March, has indicated more hikes are coming, including the possibility of another half-point jump in June.

While this may sound drastic, it’s important to point out that interest rates were slashed to historic lows in the early days of the COVID-19 pandemic in a bid to help support the faltering economy, and have remained low since, even as the economy edges closer and closer to recovery.

In truth, interest rates have broadly been lower than expected since the 2008 financial crisis, and the current rise has been forecast for some time. In the end, it has happened faster than most thought, accelerated by world events such as the war in Ukraine.

With interest rates on the rise, what do regular Canadians need to know to safeguard their own financial security? Here are a few things to keep an eye on.

A cool down for Canada’s red-hot housing market?

Property prices in Canada have continued to soar throughout the COVID-19 crisis, creating wealth gains for a fortunate few who can benefit from those values, but putting home ownership even further out of reach for many others.

As interest rates rise, however, even fewer buyers will be able to afford to take on massive mortgages, slowing both demand and sales, and creating a downward drag on home prices. This may be balanced in part by the impact of buyers who rush to enter the market before rates rise higher still.

For those who already own property and have a variable-rate mortgage, higher monthly payments are ahead, which could lead to difficult choices for those whose finances are stretched thin. Those with fixed rates have certainty for now, but will likely be paying more when their mortgage comes up for renewal.

Borrowing money will cost you more

You don’t have to be a homeowner to feel the sting of rising interest rates. If you want to borrow money to buy a vehicle, finance a home renovation project, start a business, etc., you’ll pay more in interest charges when banks raise their rates. If you have a Home Equity Line of Credit, you’re likely looking at increased costs every time you borrow.

Don’t expect to gain much by earning more on your savings

While higher interest rates may eventually mean better returns for savers and for investors in bonds and Guaranteed Investment Certificates (GICs), the impact of those extra earnings isn’t likely to be felt much as long as inflation rises faster than interest rates. Why? Earning an extra one or two per cent in interest can’t make up for a three or four per cent increase in the cost of everything you buy.

Act now to adjust spending, before it’s too late

If you’ve got debts, a limited income, or just don’t have much wiggle room in your monthly budget, the combination of rising interest rates and high inflation is likely to be a challenge. Whether you’re already an expert budgeter, or just getting started, now is the time to comb through your finances, examine every expenditure, and look for ways to cut costs and reduce spending. Shoring up your financial situation now will give you a good sense of where you stand, and how much more you can afford to devote to any debt that comes with an interest charge.

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