The Looming Interest Rate Hike in Canada: What It Means for You

It’s been a little more than a year since the Bank of Canada (BoC) shocked the world with its first interest rate hike in seven years. And while that move was largely seen as a vote of confidence in the Canadian economy, it also led to predictions of higher borrowing costs and mortgage rates for consumers. 

Well, the wait is finally over. The Bank of Canada raised the target overnight rate to 3¾ percent, with the corresponding Bank Rate and deposit rate both rising by 50 basis points to 4.0 percent and 3.75 percent respectively. This change follows our previous increase in July and is part of a larger effort to return policy interest rates back to more normal levels after years of unconventional monetary stimulus. 

So, what does this mean for you? Here’s a breakdown of how the interest rate hike will impact Canadians at every stage of life: 

1. If you’re in your 20s or 30s and just starting out… 

For many of us, our 20s and 30s are a time of major life transitions. We might be finishing school, starting our first job, getting married or buying our first home. And while all of these changes can be exciting, they can also be expensive. That’s why it’s important to be mindful of your finances and think about how an interest rate hike might impact your budget. 

If you’re carrying any debt, whether it’s student loans, credit card balances or a line of credit, you can expect to see your monthly payments rise as interest rates go up. This is because the interest you pay on your debt is directly tied to the BoC’s overnight rate. So, if you have $20,000 in student debt at an interest rate of 5%, your monthly payments will increase by about $30 when rates go up by 25 basis points. 

2. If you’re a homeowner… 

For many of us, our home is our biggest asset. And while the recent interest rate hikes have been good news for savers, they haven’t been as great for homeowners. That’s because higher rates mean higher mortgage payments for those with variable-rate mortgages. In fact, if you have a $250,000 mortgage with a variable interest rate of 3%, your monthly payments will increase by about $40 when rates go up by 25 basis points. 

Of course, not all homeowners are affected equally by higher interest rates. If you have a fixed-rate mortgage, your payments won’t change until your term is up. And if you have a HELOC or line of credit, you may actually see your payments go down, since the rate on these products is often based on the prime rate – which is currently at 5.25%. 

3. If you’re nearing retirement… 

For those of us who are closer to retirement, higher interest rates can be a mixed blessing. On the one hand, higher rates mean higher returns on our investments. But on the other hand, they also mean higher borrowing costs for things like mortgages and lines of credit. 

If you’re carrying any debt, you’ll want to consider how an interest rate hike will impact your monthly payments. And if you’re thinking about taking out a loan or line of credit in the near future, you may want to consider doing so sooner rather than later. 

On the other hand, if you have investments like GICs or bonds, you can expect to see your returns go up as interest rates rise. So, if you’re looking for a place to park your money, you may want to consider investing in fixed-income products. 

Final Thoughts 

While the interest rate hike may not be great news for everyone, it’s important to remember that rates are still relatively low by historical standards. And as the economy continues to strengthen, we can expect to see more increases in the months and years ahead.