What a 1% Interest Rate Rise Means for You – PembinaValleyOnline.com
“The Bank of Canada (BoC) is definitely looking to get inflation under control,” said Larry Davey, President and CEO of Access Credit Union, following the aggressive one-point hike in the Bank’s benchmark rate. BoC last week. The BoC rate is now at 2.5%.
“The consensus was that we thought we would see a jump of about three-quarters of a percent, but the Bank obviously wants to get things done faster, so they increased it by one percent,” Davey added.
It describes the intention behind the increase in the key rate in order to curb inflation.
“There are now people who may wonder if they will borrow money in the future. Because rates were low, people would borrow money, and they might even pay a little more for a article because rates were low on the borrower side.. With the Bank raising rates, people will wonder if they want to make those purchases. Therefore, the Bank’s hope, and what they saw in the past is that it will slow down the housing market, which is key,” Davey explained. He added that a slower housing market slows down other areas such as furniture sales and home renovations, which he says is a big deal.” If there’s a lot of demand, inflation tends to go up because people selling can get more. If demand is dampened by rising rates, it will slowly bring inflation under control.”
The other factor impacting soaring inflation, Davey added, continues to be the supply chain.
“If goods and services take longer to get here, then the ones that are here become more valuable and, they charge more for them, and as a result, that drives up inflation. If the supply chain goes back to normal, and there is no shortage of goods, we should see prices start to come down.”
As loan rates continue to rise, Davey says the biggest question on the borrower side is that members are wondering how this will affect their debt repayments. He explains that a payment on a $250,000 variable rate mortgage, or one that has just been renewed, could increase by about $30 if their financial institution follows the Bank of Canada’s lead and increases also rates of 1%. Davey suggests confirming whether their financial institution’s rates will indeed increase and whether or not to increase their monthly payments in order to keep the loan within the original amortization period.
Still, Davey notes that there are many options available, even the ability to extend the amortization period if payments are found to be getting too tight.
“What we’ve seen over the last three to five years is that the price of homes, as well as the value and the equity that people hold in their homes, has increased dramatically. So it’s reassuring that even if you did extend the amortization of the mortgage, you would at least be comfortable living day to day because you don’t want to leave yourself too short.”
But what if you have a fixed rate mortgage and are worried that interest rates will continue to rise?
“So if your mortgage is locked in for four more years, say, you can wait and see what the rates start to do. You can call the institution and say you want to extend your term and mix up the rate, and they can tell you what it is. You basically continue to lock in the rates you have now for the remaining term and then the new term, you would do at the new rate,” Davey explained.
On the other hand, he says there are people who are retired and have money in accounts that will now see their income increase due to higher interest rates.
“It helps people who may be on a restricted or fixed income to earn a bit more money and help them with their daily lives.”
And what does Davey expect in terms of future interest rate hikes by the Bank of Canada?
“I think we’ll see them go up a bit more. I’m not sure we’ll see another one per cent up but again, when was the last time and it was up half a percent I wasn’t sure how much more we would see above that The Bank of Canada makes its own decision but based on the consensus there doesn’t seem to be a sense that there will be many more bumps.