How the Bank of Canada’s Interest Rates Hike Affects You

How the Bank of Canada’s Interest Rates Hike Affects You

You’ve probably heard about the Bank of Canada’s (BoC) interest rates hike from 1% to 1.25%. Did you pass off the news as insignificant without thinking about how it would affect you?

Take a look at how the interest rates have fluctuated in the past years:

  • Interest rates were 4.25% in January 2008
  • Thanks to the financial setback, the rates dropped to 1% in January 2009.
  • Up until January 2018, interest rates have remained steady at 1%.
  • And that means that the rates have climbed a quarter of a percentage point after a decade.

How does the BoC’s rates hike affect you?

The BoC acts as the main lending institution to consumer-facing banks. Because of this, any changes in its lending rates are reflected in the rates banks levy on the amounts they lend. As a result, in anticipation of the BoC’s announcement the six major banks of Canada raised their mortgage rates. Accordingly, in the coming weeks consumers are likely to notice a rise in the interest rates they’ll pay on mortgages, credit cards, student loans, and car loans.

Interest rates on credit cards

Most credit cards carry a variable interest rate which is typically many percentage points above the prime rate. Given that this prime rate is fixed according to the rates levied by the BoC, you may find that you now pay higher rates on your credit card’s unpaid balance. Take, for example, the interest on the Rate Advantage Visa Card offered by the RBC.

Of course, if you have a credit card with a fixed interest rate, the BoC rate hike will not affect you. However, if you’re paying higher interest rates on the mortgage and any other loans you have, covering your credit card bill payments may present a bigger challenge.

Interest rates on mortgages

Interest rates on mortgages have already been hiked by the major banks. In response to the hike by the BoC, they could go up even further. Let’s try an example. Say you’re buying a house for the price of $500,000. The amortization period is 25 years and required down payment is 10%. Before the BoC hike, the interest rate on mortgages was 4.99%. Accordingly, you were paying $2,702 repayments each month. But now that the banks have raised the interest rates, you’ll pay an amount of $2,745 per month, a hike of $480 every year.

Interest rates on car loans

The hike in interest rates could similarly affect the payments you make towards a car or vehicle loan. At present, the CIBC offers loans for buying a car at a 3.2% interest rate. Perhaps you’ve bought a car worth $10,000 and you intend to pay off the loan over a period of 4 years. Accordingly, you’ll pay $222 each month where the total interest on the loan is $667. With the hike in interest rates to 3.5%, you’ll pay only $2 added interest per month. However, the total interest on the loan now stands at $731.

Interest rates on student loans

Students may also find that they’re paying added interest on their loans. Take, for instance, the annual tuition at Ryerson University in Toronto. The undergraduate course in the arts stream is $7,415. As a result, you’ll pay a total of $29,600 for the complete 4-year course excluding the cost of rent, transport, and books.

Typically, a fixed rate line of credit for students at TD is a prime of 3.2% plus 1.5% which is a total of 4.7%. Accordingly, you’ll pay a total interest amount of $1,410 over the 4-year loan period. However, if the interest rate is variable and the interest rate rises from 4.7% to 5.2%, you could end up paying a total interest amount of $1,560 on the loan.