On June 1st, the Bank of Canada announced another interest rate hike of 0.5%, making it the third increase this year. With more increases expected throughout the year, many Canadians are wondering what this means for their money. Although rising rates could affect the repayment timelines of loans, it also means more returns from savings options like GICs.
How will rising interest rates impact my loans?
The most immediate impact from rising interest rates can be seen in any variable rate product such as a line of credit or a mortgage. For someone who owes $100,000 on one of these products, a 25 basis point increase in interest rates translates to a $250 annual increase in borrowing costs.
With forecasts ranging from 50 to 150 basis points expected increases over the next 18 months that same borrower could face $40 to $120 increase in monthly interest charges. For the borrower, that means either coming up with additional funds every month, or in the case of a mortgage not paying down your principle as quickly as you would at lower interest rates.
*This is just an interest calculation that does not include principal payments
What are the best ways to save right now?
The silver lining of interest rate increases, is that the rate of returns goes up in relevant investment vehicles as well. This means any funds you have set aside in GICs or High-Interest Savings Accounts will start to grow quicker than in the recent past. With that being said although these returns have increased, their rate of return may not match the current rate of inflation. In order to protect yourself against inflation, you may want to consider saving a portion of your money in investments like market-linked GICs or mutual funds that may better protect you against inflation-related fund depletion. Whether you prefer to play it safe and take advantage of rising rates of return, or have more appetite for risk and are looking to offset the rate of inflation that often accompanies rate hikes, it’s always a good idea to review your goals and your portfolio with your advisor. They can take stock of market conditions and how it may impact your current financial goals, and put together a plan that makes you feel confident about your path forward.
How will this affect my everyday accounts and how can I prepare?
Here are some basic tips for adjusting to the interest rate increase:
- Take some time to review the types of accounts you have, and how they fit into your overall financial plan.
- Make sure you understand how your line of credit or mortgage works.
- Be prepared to pay more than your currently monthly amount on your line of credit going forward.
In short, you will need to begin budgeting and preparing to pay more on credit cards, lines of credit, and loans.
Feeling gloomy about these changes? Don’t worry. You can also expect some good news. Savings accounts will begin offering more attractive interest rates, making low-risk and guaranteed investing strategies potentially more appealing for your financial plans.
We’re here to help.
If you’re still unclear what this could all mean for you, connect with one of our advisors. We’re on standby to help you make sense of these rate hikes and feel confident about your finances. Call us at 1.888.517.7000 or book an appointment online.