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Raising Of The Rates: What Would Happen?

by | Jun 26, 2017

There has been buzz lately about the rising of interest rates and what that could mean for Canadians. The media can tend to pump up these mortgage rate increases as though it were the appending apocalypse, touting headlines saying Canadians are headed in to mass debt, how our economy will collapse, etc. However, we wanted to take a different approach. Yes, the rates will most likely go up. Yes, for some, mortgage payments will increase. However, it might surprise you to learn how manageable those increases will be.
 
Forecasts and projections that were recently released showed the potential impact a rate increase would have on Canadian Debt as a whole.  Currently, Canadians need 14.2% of their after tax income to keep up with principal and interest payments. If the rates go up, over time that could jump to 16.3%.
 
The main source of the rise in debt repayment would be due to the Bank of Canada (BofC) raising its Prime Lending Rate. Think of the Prime Lending Rate as the centre of all things to do with debt and lending. The BofC will slowly increase the rate if the economy starts to heat up in order to maintain balance. Similarly, the BofC will slowly decrease the rate if the economy begins to falter. The reports are showing that by mid 2020 the rate could rise from its current position at 0.5% to 3%.
 
This would never be done all at once, and the impact will be felt marginally by most Canadians. For an example, let’s look at how mortgage would be impacted by a rise in rates.
 
The average interest rate for most mortgages sits at ~2.9%. If the BofC began to raise the prime lending as projected, it would do so in marginal increments (~0.25% per increase). Those with a fixed rate would not feel the impact of this, but those at a variable rate may experience a very minor increase in the amount of interest they are paying back.  As a rule of thumb, the ~0.25% increase works out to about $13.00 more per month for every $100,000 of borrowed money. A more than affordable cost for most Canadian Families. In addition, those on a variable rate have to qualify for their mortgage at the Bank Of Canada rate anyways to ensure that you can continue to make payments if rates rise—basically your mortgage term has a plan built into it that will allow you to experience minimal (if any) financial strain should the rates rise.
 
So what is the bottom line? Are rates likely to increase?  Yes.  They are insanely low and have been for quite a few years.  Does this mean you paying more in interest if rates rise?  Yes.  Am I still going to be able to afford my payments?  YES!   There are very few people that $13.00/100K a month is going to really even cause a blimp in their day to day spending.
 
It just might mean you have to pass on those Starbucks visits once in a while.
 
If you do have any questions though about the rates rising get in touch with a DLC broker. They will be happy to walk you through what the rate increase would mean for you personally, and put to rest some of those doomsday-esque headlines for you.

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