The Bank of Canada raised its key lending rate by a quarter percentage point to 1.25 percent on Wednesday, the highest it has been since 2009. This is the third interest rate hike Canadians have seen in the last six months, catalysed by strong employment numbers and a growing economy across most provinces in 2017.
“Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity,” said the central bank in a statement. “However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economy.
The Bank of Canada rate hike will have an impact on interest rates associated with mortgages, savings accounts and lines of credit. In fact, by Tuesday evening, all “Big Six” Canadians banks had raised their mortgage rates. The rate on a five-year fixed mortgage, for instance, went up to 5.14 percent, from 4.99 percent at most major lenders.
Just six months ago, Lisa was paying $498 every two weeks on her mortgage of a one bedroom apartment in downtown Toronto. In a given month, Lisa’s fixed expenses — maintenance fees, property taxes, and utilities — would amount to roughly $1600, a number that was manageable on her $60,000 salary, but only if she really made an effort to save on eating and drinking out.
According to today’s rates, Lisa anticipates that her biweekly mortgage payments will now be approximately $70 more than it was six months ago — that’s an additional 2.8 percent of her yearly salary. “The amount I spent on my apartment took up almost 50 percent of my take home pay. So it was tight, but now it’s even worse,” she told VICE Money.
A recent survey conducted by business advisory firm MNP showed that over 30 percent of Canadians are concerned about the prospect of bankruptcy in light of rising rates. In fact, that figure is significantly higher among millennials and gen-xers — the survey suggests that 50 percent of young Canadians say they will be in financial trouble if rates continue to go up. That survey was conducted before today’s rate hike.
“Many people took on massive mortgages when interest rates were low. Maybe they’ve had daycare to deal with or maternity leave, or housing repairs to handle financially, and weren’t able to hammer down the principal like they had planned,” said personal finance expert Shannon Lee Simmons. “Now, a rise in interest rates feels scary on hundreds of thousands of Canadians.”
It’s important to remember that the cost of borrowing has been at a historical low for the last nine years — in the decade prior to the 2009 financial crisis, rates hovered between the two percent and six percent mark. In fact, in the mid-80s, rates were as high as 14 percent.
“I think a small change in interest rates won’t put people completely under,” Simmons told VICE Money. “From what I see, it would have to be significant, maybe two to three percent to have such an impact that people would not be able to pay their bills.”
In the meantime, based on the Bank’s concerns over NAFTA negotiations and slackened wage growth, economists are predicting that rates are unlikely to rise again for the next six months at least.
“NAFTA uncertainty hangs over the outlook, with the Bank explicitly downgrading the outlook for business investment and trade to account for the impact of negotiation,” wrote TD Bank Senior Economist Brian De Pratto in a note Wednesday morning. “it remains our base-case view that a gradual pace of tightening is most likely, with the next hike penciled in for July.”