On April 13, 2022, the Bank of Canada (BoC) increased interest rates by 50 basis points to 1%.

What does this mean for you?  Let’s take a look.

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.

What does the rate increase mean for homeowners?

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

  • Fixed-rate mortgage

f you have a fixed-rate mortgage that will be renewed shortly, the new interest rates could increase your monthly payments, 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

If you’re 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.

This increase means that the stress test will be slightly 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.

Worried about the interest rate hike? Don’t have a plan?

 

An advisor can help you.

 

Find a Sun Life advisor

How to prepare for an interest rate rise?

While this latest hike is a significant move, it's important to note that interest rates are still at historically low levels. In the early 2000s, prior to the recession, the overnight rate was 2.75%, which is 1.75  full percentage points higher than the current interest rate.

In 2020, faced with the COVID-19 pandemic, the Bank of Canada lowered its policy interest rate to 0.25% to boost the economy. It increased the rate recently to rein in inflation, which has continued to rise in the past few months.

That said, it is very likely that the Bank of Canada will continue to raise interest rates in the near future.  Spend prudently and chip away at your debt, so any rate hikes have the least possible negative impact on your finances.

 

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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.