The benefits, and drawbacks, of a higher interest rate in Canada
If you have a mortgage or other types of loans, rising interest rates could present you with some significant financial challenges. However, there may be ways to take advantage of the situation.
Interest rates creeping up, albeit slowly
Interest rates in Canada have been low for some time. The Bank of Canada's move to increase its lending rate in the summer of 2018 to 1.75% is significant, but it remains relatively low.1 For example, in the early 1990s the interest rate was roughly 10 times what it is today, and it was even higher in the 1980s.2
How Canadians are responding to higher rates
A recent poll by consulting firm MNP shows roughly half of all Canadians say they're feeling the effects of rising interest rates.3 A poll from Nanos Research suggests that Canadians are spending less due to rising rates.4 Canada's housing market, which has been very hot for a few years now, may also be cooling off as higher interest rates push mortgage payments up.5
How higher interest rates may affect your loans
Higher interest rates make loans and mortgages more expensive. Homeowners in cities with pricey real estate, like Vancouver and Toronto, could pay hundreds of dollars more on regular mortgage payments. Higher interest rates also affect other loans like lines of credit, vehicle financing and student loans.
If you have a student loan, you can expect the cost of paying off your loan to increase along with the interest rate. Since the year 2000, most lenders have determined their rate for student loans by taking the prime rate and adding 2.5% for variable rate loans and 5% for fixed-rate loans.6
It's a good idea to take a close look at your finances and explore how higher rates could affect you in the future.Opens a new website in a new window
The benefits of higher interest rates
Higher interest rates can be good news. The savings in a "high-interest" bank account could grow faster. Also, many fixed-rate investments, like guaranteed interest optionsOpens a new website in a new window or guaranteed investment certificates (GICs), could provide higher returns. You can also work with a financial security advisor to update your mutual funds and segregated funds policyOpens a new website in a new window to help you take advantage of higher interest rates.
There are some simple ways to make the most of rising interest rates, or at least limit their negative impact. For example, if you have an open mortgageOpens a new website in a new window, explore changing it to a closed mortgageOpens a new website in a new window. Unlike an open mortgage, a closed mortgage won't be affected by changes in the interest rate.
For the time being, interest rates aren't exactly skyrocketing, which means the total return on your investments will likely remain modest. Eventually, however, a rising interest rate could translate into more income for your investment portfolio, especially those that are fixed income, like bonds and GICs. (Your fixed-income investments also serve as an important counterweight to any investments in stocks, particularly when the stock market experiences a downturn).
How you can manage a rising interest rate
You can also have a conversation with a financial security advisor about re-tooling your savings and investments to make the most of rising interest rates. They may be able to help you find solutions that provide a better return as rates move up.
At the same time, it's a good idea to take a close look at your finances and explore how higher rates could affect you in the future. While today's interest rates may seem high compared to a few years ago, future increase could have an even more dramatic impact on your savings, loans and investments.
1 “Bank of Canada raises interest rate: Read the official statementOpens a new website in a new window,” National Post, July 11, 2018.
2 “Canada Interest Rate, 1990-2018Opens a new website in a new window,” Trading Economics; Richard Blackwell, “Remember when: What have we learned from the 1980s and that 21% interest rate?Opens a new website in a new window” The Globe and Mail, updated June 5, 2017.
3 Grant Bazian, “Indebted Canadians say they would need to make almost 40 per cent more to live without consumer debtOpens a new website in a new window,” MNP, May 24, 2018.
4 “Canadians are seven times more likely to say higher interest rates have negative rather than a positive impact on their personal spendingOpens a new website in a new window,” submitted by Nanos to Bloomberg News, August 2018.
5 “What the Bank of Canada rate hike means for your mortgage and savings accountOpens a new website in a new window,” Financial Post, July 12, 2018.
6 “Canadian students owe $28B in government loans, some want feds to stop charging interestOpens a new website in a new window,” Global News, updated May 31, 2018.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.