Since the start of the new year, you have been managing your finances. It is always a good idea to look back on your financial progress over the last few months and identify how effectively you have been in at this goal.
Well, now that we are just a little over the midway point of 2017, financially-speaking, how do you think you’ve been doing??
Whether or not you believe you’ve been fairing well …. one new part of the equation that is likely to impact your finances moving forward, are interest rates.
As a part of your mid-year review, here you can also take into account …. will Canadian interest rates rise in 2017?
Well, as of mid-July, the answer to this questions is yes. At that time, the Bank of Canada did raise it’s key interest rate from 0.5% to 0.75%. This marks the first large increase in the past seven years.
While this may be seen as a sign of economic growth, it can also be an indication that borrowers may want to curb back their credit levels and monitor and decrease their debts.
Back in 2015, when the Bank of Canada lowered rates – while only a quarter of a percent, remember this did actually occur more than once that year. Since interest rates are typically affected by the nature of the economy at that time, this was a response to a sluggish economy. In turn, now that we are experiencing an economic upswing, the Bank of Canada has made the move to finally increase rates, after years and months of speculation.
In fact, the economy is expected to see a lot of growth in the next couple of years. It has been forecasted that in 2018, we will see a 2.0% increase, followed by another 1.6% in 2019. While it is true that these projections are subject to change, it does boast well for the Canadian economy.Therefore, interest rates are likely to either stay the same, or even increase further.
With that being said, how will these rate increases impact Canadians?
As mentioned, Canadian interest rate hikes can also be in response to high house hold debt levels across the country. One current prediction, is that the housing market should begin to finally cool it’s heels, and this will also impact residents of Canada in a variety of ways. A move to more financial stability is of course a hope for many Canadians.
Well, with an increase by the Bank of Canada, it is no surprise that major banks would also follow suit. The Bank of Montreal, TD Bank, and the Royal Bank of Canada have all already revised their prime rates with an increase from 2.7% to 2.95%. Since prime rates are set for variable rate loans, this will and already has affected mortgage products and home equity loans for many Canadians.
With that said, not only does this affect new loans, it also impacts existing loans. As a result, of those Canadians with a variable-rate line of credit or mortgage, they will have already experienced an increase in their monthly interest rate and subsequently also the size of their monthly payments.
Getting back to the topic of household debt, the reality is that many Canadian struggle with debt. It is estimated that the average borrower is carrying a debt load of more than $22,000 -and this can be in addition to their actual mortgage.
With a large portion of borrowers having variable rate mortgages and loans over fixed rates, this again presents issues with increased debts – at least for the time being. With lower rates, it makes sense that many borrowers have opted for variable rates over fixed, however perhaps this attitude may change as rates increase and instead many will look towards fixed rates moving forward.
Will higher rates deter Canadians from taking on more debt?
With a soaring housing market, homebuyers have also been exceeding their budgets in many ways. With their current mortgage sizes and increasing interest this may also impact home loan borrowers significantly. For this reason, it will be even more important for them to watch their spending in other areas,
For those buyers who are starting to look for home, perhaps they will have an advantage in response to a slower housing market. On one hand, they might find they can go into a mortgage with a lower principal balance, however they can expect a higher rate. At this point, the decision may be a fixed or a variable-rate? Overall, it will be best to as always, ‘crunch’ the numbers and see which scenario will be more affordable.
In the end, the question of the hour is: will this interest rate increase help to curb debt in Canada?
While, variable rate borrowers are certainly going to be impacted by this increase. However over time, hopefully this can also lead to a variety of positive financial changes as well. All in all, perhaps this interest rate increase will have the desired affect and encourage Canadians to take steps to rid themselves of their heavy debts loads.
