On January 25, 2023, the Bank of Canada (BoC) once again increased interest rates by 25 basis points to 4.50%. It’s the first hike of the year, but it comes right after seven consecutive rate hikes in 2022.

Why is this happening?

The COVID-19 pandemic changed the economic landscape in 2020. To boost the economy, the Bank of Canada lowered its policy interest rate to 0.25%.

Over the last year, since January 2022, the BoC has raised its policy interest rate by 425 basis points. The BoC is raising rates to attempt to rein in high inflation.

In June 2022, inflation reached 39-year high of 8.1%. Though inflation has slowed in the months since, it remains high. Too high for the Bank of Canada, that hopes to slow the economy.

Let’s look more closely at how policy interest rates work and how they can affect your finances.

What is a policy interest rate?

The policy interest rate is set by a country’s central bank, such as the Bank of Canada. The Bank of Canada’s policy rate serves as a reference point for the rates that the banks charge to consumers.

These rates affect the interest rates you pay on:

  • your mortgage,
  • your home equity line of credit, and
  • other types of credit.

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What does the rate increase mean for homeowners?

Are you planning on renewing your mortgage, buying a home or taking out a loan?  Ask yourself, “Can I handle that debt or that new loan at a higher interest rate than I’m receiving today?”

  • Fixed-rate mortgage

If you’re renewing your fixed-rate mortgage soon, the new interest rates could increase your monthly payments. This increase could have an important impact on your budget especially if:

  • your new amortization period is short, and
  • the balance on the mortgage at the time of renewal is substantial.

For a precise indication of how your mortgage payments could change, contact your mortgage broker or lender.

  • Variable-rate mortgage

If you have a variable-rate mortgage, this latest increase will affect you differently. You will likely see your payments increase within the next month, so that they mirror the new prime rates.

  • Stress test now harder for some homebuyers

Are you buying a new home? Federal rules require you to pass a stress test if you’re making a down payment of less than 20%.

The stress test requires borrowers to prove they can make mortgage payments at whichever rate is greater:

  • the rate offered by their lender, or
  • the 5-year fixed rate set by the Bank of Canada.

All of the recent increases will likely make the stress test more challenging for some homebuyers.

What does the interest rate increase mean for savers?

When interest rates go up, so do consumers' expectations for interest rates on savings accounts. This hike may mean slightly higher rates on savings accounts and guaranteed investment certificates (GICs) down the road. The banks aren’t obligated to raise savings account interest in proportion to borrowing interest rates, but competitive pressures may eventually result in a rise.

How to prepare for an interest rate rise?

The steady hike in rates since January 2022 have changed the landscape for those taking out a loan. Especially for homeowners who’ve enjoyed years of historically low rates. Economists are divided as to whether this most recent hike will be the last for now. Whatever the economic forecast, it’s never a bad idea to:


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This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.