July 12, 2017 2:45 pm

How the Bank of Canada’s interest rate hike affects your wallet

With the Bank of Canada’s raising the key interest rate for the first time in nearly seven years, we explain what an interest rate is and how it may affect you.

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As widely anticipated, the Bank of Canada (BoC) raised its key interest rate to 0.75 per cent today, up from 0.5 per cent. It was the first increase since September 2010, and most economists expect a second hike of 1/4 of a percentage point in October.

The BoC’s move affects a broad range of interest rates, from mortgages to lines of credit, setting the stage for higher borrowing costs across Canada.

READ MORE: Mortgage calculator: See how rising interest rates affect your payments

Here’s a look at how this and future rate increases impact mortgages, home equity lines of credit, car loans and credit cards:

Mortgages

The BoC’s announcement affects both fixed-rate and variable-rate mortgages.

READ MORE: What you need to know about mortgages if interest rates rise

Fixed-rate mortgages:

  • Payments for current homeowners stay the same. As the name implies, the interest rate on this type of mortgage is fixed. Regardless of what the central bank does, your rate won’t change until your mortgage comes up for renewal.
  • Higher rates at mortgage renewal. When your mortgage term is up, you will probably face a higher interest rate at renewal. The BoC’s rate hike is one of several factors that have been pushing up fixed rates on new mortgages. This will affect mortgage refinancing as well. Still, keep in mind that if you have a five-year mortgage that will be up for renewal soon, today’s rates might be lower than the rate you locked into five years ago. To check how much higher your future mortgage payments might be, check out our mortgage calculator.
  • Higher rates for prospective homebuyers. Generally speaking, an interest rate increase by the central bank puts pressure on fixed rates to rise as well. If the BoC keeps hiking rates over the next year and a half, as it is expected to do, you can count on higher mortgage rates. However, when an interest rate move is widely anticipated, fixed rates generally adjust ahead of the central bank’s announcement. According to some analysts, fixed rates on Canadian mortgages have already absorbed today’s move, for example. Still, rates will continue to climb if the BoC opts for another increase this fall. To get an idea of how rising rates affect mortgage payments, see here.

Variable-rate mortgages:

  • Your payments are going up. A variable rate moves up or down along with the general level of interest rates in the economy. Today’s BoC hike means your mortgage payments are going to go up. Usually, banks adjust their variable rates within days or even hours of the central bank’s announcement. You can use our mortgage calculator to see how much more you will be paying.
  • Does is make sense to switch to a fixed rate? Variable-rate mortgages come with the option of switching to a fixed rate during the term of the loan. Doing so might buy you peace of mind if the thought of rising interest rates keeps you up at night. But conversion rates are usually higher than the interest rate lenders advertise on new fixed-rate mortgages. Some lenders also demand that borrowers locking in sign up for a five-year term, no matter what the remaining term of their current loan is. If you do the math, you might find that you’re better off sticking with your variable rate. You can read more on rising interest rates and variable-rate mortgages here.

Home equity lines of credit

  • Your payments are probably going up. Most home equity lines of credit (HELOCs) have variable interest rates. While today’s rate hike was small, a series of increases could prove problematic for overstretched borrowers who opted for HELOCs that allow for interest-only payments. If you’re worried about bigger debt repayments, you might be able to switch to a fixed rate. More about HELOCs here.

READ MORE: The 4 big risks of home-equity lines of credit

Other lines of credit

  • Your payments are probably going up. Lines of credit in general often carry variable rates. Even though today’s rate hike was small, you might feel the pinch if you have an unsecured line of credit (i.e. not backed up by an asset such as a home or a car), which generally has a higher interest rate of 5 to 7 per cent.

READ MORE: Could you handle a 33 per cent interest-rate hike on your debt? If not, start paying it off now

Car loans

  • Your payments will likely stay the same. Most auto loans have fixed payments, whether your rate is fixed or variable.
  • Your loan repayment period will stretch out if you have a variable rate. Your payments stay the same, but it will take you longer to pay off your loan. More about auto loans here.

READ MORE: Here’s what happens to your car loan if interest rates rise

Credit cards

  • Variable-interest credit cards. As with all other credit, if your card has a variable interest rate, your monthly debt repayments will go up.
  • Fixed-interest credit cards. A central bank rate hike doesn’t directly affect your interest rate. If paying more on all your other loans causes you to miss your minimum monthly payments, the financial institution that issued your card might raise your fixed rate. That increase could be as much as five percentage points, according to the Financial Consumer Agency of Canada.

READ MORE: Canadian provinces ranked by average consumer debt: Equifax report

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