Canadians woke up to news this week that the Bank of Canada has once again increased its benchmark interest rate (also called the “overnight rate”), a further 75 basis points from 2.5% up to 3.25%.
Since March, the rate has increased by 300 basis points, which is the largest increase in roughly 30 years.
For many Canadian households, how this increase in the benchmark interest rate will impact your household budget will depend on a number of factors.
For those who have a mortgage that is locked in, or have a fixed payment, this may be of little concern. But for others who have a variable payment that rises with increased interest rates, this may be a very serious concern.
Some people may have a variable rate mortgage, where their costs simply go up or down with the prime rate (plus or minus any negotiated discount), which tracks the Bank of Canada benchmark rate.
Others, with variable rate mortgages with a ‘trigger rate” may be contacted by their banks or lending institutions, advising them because rates have risen significantly, their scheduled payment amount must be higher as the interest portion on their mortgage is now higher than the principal payment.
As we have had historic low interest rates for an extended period of time, these “trigger rate” increases are not common and those with that kind of mortgage will likely have some sticker shock when they see the revised payment amount.
Conversely for those with an interest-only line of credit or other forms of debt such as credit cards, there may also be a significant increased payment because of this interest rate increase.
One of the challenges when trying to assess the impact to family households of these types of increases, on debt related interest payments, is a lack of region-specific information.
In addition, with many mortgage lenders in the marketplace, the impact on some borrowers may be very different from others as a result of contrasting lending practices.
While there is an Ottawa-imposed “stress test” that is applied uniformly across the mortgage industry, as some have pointed out, it does not take into account the increase in local property taxes that, in many cases, are also well above inflation.
In addition, for those who live in strata properties, insurance costs have also gone up with premium increases significantly beyond the rate of inflation.
For those that are impacted by higher interest rates, let us recognize that, with less disposable income, there is less money to put into our local economy.
My purpose in raising these concerns related to the increase in the interest rate is to ask you if this is something that will impact your household to the point of serious concern?
If your household has, or will be adversely impacted by these increased interest rates, or even if you are in a situation where you are not impacted, I would appreciate hearing from you.
I can be reached at [email protected] or call toll free 1-800-665-8711.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.