The Bank's rate hike, and its trickle-down

The Bank of Canada finally raised its key overnight rate by a quarter percentage point, bringing it to 0.75 per cent. This is the first time it has been increased in seven years. Economists are expecting another rate hike in the fourth quarter of this year. In response, lenders have adjusted their variable mortgage, line of credit and loan rates. These changes have trickled over to fixed rates as well.

The big question is, how will this change impact you?

Rate hike for holders of variable or adjustable mortgages

Variable- and adjustable-rate mortgages are determined by the prime interest rate and are linked to the overnight lending rate set by the Bank of Canada. Rates will also be dependent on each individual lender and how much they will increase their own prime interest rate. Current mortgage holders with fixed interest rates will not see a change on their monthly payments. However, people who are taking on a new fixed-rate mortgage or renewing their old one right now have already noticed a rate hike. The reason for this is that fixed mortgage rates are dependent on the bond market. The bond market has already started to ripple, thanks to the increase in the interest rate by the Bank of Canada.

Unsecured and secured lines of credits

Similar to variable- and adjustable-rate mortgages, lines of credit are normally linked to the bank’s prime interest rate, which is linked to the Bank of Canada’s overnight rate. This means that if you are borrowing money from a line of credit, you're also seeing a rate hike.

Loonie looking up...

The rate hike by the Bank of Canada has put the Canadian dollar on an upward trajectory. This means that if you’re planning a shopping trip to the States, or an international trip, you’ll get more for your Canadian dollar.

Saving accounts

The Bank’s overnight rate hike will affect the interest you earn from a traditional savings account. There won’t be a huge change, but if you’re earning some interest before, you’ll be earning a little bit more now. Even though your interest earned will have increased, it might be worth it to explore other investment options!

While interest rates are still low, there’s something very different about the rates, since the government’s mortgage rule changes took effect last October. Having a 20-per-cent down payment or more, interest rates are higher. So, when you see lower advertised rates, these are for mortgages with less than 20-per-cent equity. The rates are slightly higher for people who are refinancing, or for any new purchases with 20 per cent or more down. In addition, the Office of the Superintendent of Financial Institutions, the financial institutions regulator, is proposing that banks stress-test non-insured borrowers at two per cent points above the contract rate. This is despite the fact that non-insured borrowers are putting at least 20 per cent down on their home purchase.

If your mortgage is coming up for renewal, if you are thinking of refinancing or looking at purchasing a new home, explore all your options based on your individual needs.