The Bank of Canada has raised its policy interest. If you’re wondering why—and how the increase will affect your financial plans—read on for the answers.
What is the policy interest rate?
The policy interest rate is the fixed interest rate set by a financial institution for a country or group of countries. This determines how much it will cost to borrow money from a central bank.
In our case, the Bank of Canada is the one that is regulating, among other things, the country’s economic activity. Once the Bank of Canada sets the policy interest rate, other financial institutions use it to set the interest rate on a variety of loans (personal, mortgages, etc.) offered to clients.
The current increase is an attempt to counteract inflation, which is rising in Canada and the United States.
How does an increase in the policy interest rate affect my finances?
Most people will be affected by a policy interest rate increase. This means that they’ll pay more interest on their loans. Households and businesses are more likely to reduce their expenses when this happens. Demand for goods and services is expected to decline and their prices may stabilize in the future:
- If you’re planning to buy your first home, you might have to rethink your budget for the first few years because rising mortgage rates may change how much you can borrow.
- If you have a variable rate mortgage, your monthly payments will increase. Fixed rate mortgages will only be affected when you renew.
- This could be an opportunity to make new investments. While the market is down right now, it could be the right time to buy low on interesting stocks. Also, investments such as GICs or bonds see their interest rates rise in a period of rising rates.
- If your mortgage term expires in less than 6 months, an early renewal may be the key to helping you secure a lower rate before the next rate increase without penalty. If your term expires in more than 6 months, you’ll need to consider the penalty fee when making a decision on early renewal.
- While food, gas, and furniture cost more than this time last year, now’s the right time to readjust and evaluate your budget.
Reach out to me if you have any questions about your mortgage!