Shoes are fun. Thinking about interest rates—not so much. But the Bank of Canada raised its interest rates twice in July, which might affect your ability (now or in the future) to indulge your shoe habit. The new government policy of raising interest rates after years of reducing them and/or holding steady has some unpleasant implications for consumers.
The Bank of Canada rate sets how much it costs commercial banks and other lenders to borrow money. The banks borrow the money and then charge consumers a higher rate in order to make a profit. The rate of interest a consumer pays depends on a variety of factors. Types of loan (mortgage, line of credit, or credit card) have different risk factors, and each person’s credit rating also affects how much a lender will charge.
The Bank of Canada is raising rates for a couple of reasons.
By raising interest rates, the Canadian dollar becomes a little weaker. A strong Canadian dollar is great for Canadians taking a vacation outside of the country or shopping south of the border. But when Canadian manufacturers try to sell outside of Canada, our goods and services become too pricy compared to other nations. Everyone loves a bargain—whether cross-border shoe shopping or ordering a new fleet of airplanes from Bombardier!
More immediate for the average consumer, commercial banks like BMO, RBC, TD-Canada Trust, etc. can raise their own borrowing rates and usually add a bit extra. This makes it more profitable for banks to lend money, which makes it easier for consumers to borrow money as banks become more eager to lend it. The down side is that consumers pay more interest.
For example, the interest on a 20 year amortized mortgage of $100,000 at 5% is $58,389. Bump up the interest rate by just 1% and the mortgage holder now pays $71,943 in interest. That’s more than an extra $13,500 in interest. Or you can look at is as an average of $675 less to spend on shoes annually over the 20 years of the loan’s payback.
The Bank of Canada has not ruled out more increases—and many economists think they will continue to raise it for the foreseeable future. But a bit of planning on your part can reduce the impact. If you need a mortgage or if your existing mortgage is coming up for renewal take advantage of a mortgage specialist instead of going from bank to bank for quotes. The mortgage specialist can access dozens of lenders and get the best rate from each of them, due to competition. If you are thinking about a major consumer purchase, it might be wise to buy now, before it costs stores more to finance the “no money down” type of purchase.
So, if you have had your eye on that perfect pair of Jimmy Choo’s in Saks Fifth Avenue, buy them before the Canadian dollar goes down and you have less discretionary spending money thanks to those higher interest rates.
Jacqueline, AMP at Dominon Lending