Interest rates in Canada might rise soon

Borrowing money is about to get more expensive

by Vanmala Subramaniam
Jun 28 2017, 2:03pm

Bank of Canada governor Stephen Poloz has given Canadians the strongest hint yet that interest rates will be going up very soon.

“Well rates are of course extraordinarily low and we cut them by 50 basis points in 2015 to counteract the effects of the oil price shock,” Poloz told CNBC in an interview Wednesday morning. But, he added, “it does look as though those cuts have done their job.”

This is the most significant announcement Poloz has made to date regarding interest rates.

The Bank of Canada usually meets about eight times a year to assess the country’s economy and determine what policy tools should or should not be used to ensure things are running smoothly.

Since 2015, because of how the rapid drop in oil prices slowed down Canada’s economy altogether, interest rates have hovered at the 0.5 percent mark. Low interest rates, in theory, are supposed to get people and companies spending. If the cost of borrowing is low, more people will access credit, more spending will occur to use that credit, thence stimulating the economy.

The next interest rate announcement is due on July 12th, and based on Poloz’s Wednesday comments that our economy is revved up enough, there is a strong possibility that the hand-holding will cease, and rates will rise.

If you’re a homeowner, start saving

The biggest (and possibly most troublesome) impact of an interest rate hike is the subsequent rise in mortgage rates. Let’s assume you have an outstanding mortgage of $400,000, and your current mortgage rate is 2.25 percent. This handy mortgage calculator tells me that your monthly mortgage payments are $1742.45.

Now let’s say interest rates go up 0.25 basis points to 0.75 percent. At the VERY minimum, the mortgage rate set by your bank, will go up 0.25 percent as well. At a rate of 2.5 percent, your monthly mortgage payments go up to $1791.85 per month.

That’s $50 extra, or three decent bottles of wine that you’ll have to give up every month.

Granted, that might not sound like a lot, but remember that firstly, banks will most likely raise mortgage rates more than 0.25 percent and secondly, considering that the average home price in a city like Toronto is almost $900,000, your mortgage is probably significantly more than $400,000.

If you don’t own a home, you missed out on the advantages of cheap credit

But there might be a silver lining.

The real estate boom taking place across Canada has been largely attributed to low interest rates. Sure, foreign speculation and population growth have been factors, but for the most part, Canadians are incentivized to buy a home because they end up paying so little in interest on their mortgages.

Economists are widely predicting a slowdown in the housing market, and to some extent the economy, if interest rates start to rise.

That’s no surprise — residential housing investment currently contributes to a hefty eight percent of our overall GDP. A recent note by Capital Economics predicts that GDP growth will slow from 2.4 percent in 2017, to 1.2 percent in 2018, sheerly due to the drop in home prices (and hence home sales).

Lower home prices are a great thing for all of you who have been biding your time, accumulating those pennies to dump on a home that used to be worth $900,000.

If you’re an avid traveller, you’ll soon embrace the Canadian dollar

This time back in 2014, the one Canadian dollar was worth 94 American cents. Fast forward three years, a loonie is only worth 77 American cents. The drop in the value of the Canadian dollar has indeed benefited out export sector (our good are more competitive on the world market), but it has screwed over traveling Canadians.

If and when interest rates rise, you can expect the value of the loonie to rise too. This is only because higher interest rates attract foreign capital — investors get more bang for their buck by parking their money in a high-interest environment. The flow of foreign money into Canadian banks will increase the demand for Canadian currency, and hence the value of the Canadian dollar.

Of course, there are other mitigating factors like inflation and oil prices that can push the loonie down, but with higher interest rates, there’s a better chance that in the long run, one Canadian dollar will be worth more than it is right now.

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