Are you ready for an interest rate hike?

The Bank of Canada has been sending a clear and steady signal that come June, the key interest rate may not hold steady any longer at .25%.

For years I’ve followed these announcements. I’ve followed them because I’ve had a variable interest rate mortgage for many years.  I will say, for the years I’ve had (and continue to have) variable rate mortgages, I have totally been the victor. I always keep a record of what the fixed rate would have been when I’ve renewed my term, and then compared the interest I would have paid with the interest I have paid. Over the last decade or so, I’ve saved a bundle in interest.

The Bank of Canada Governor Mark Carney promised last year that he’d hold the .25% until June of 2010. He has kept to his word. (More than I can say for everybody in Ottawa, but I digress). He has taken the time, during the last couple of rate announcements, to talk about Canada’s economic recovery, GDP and inflation in ways that I don’t pretend to understand. I have understood his message that interest rates cannot stay where they are for much longer. This has been crystal clear.

What if you don’t have a variable rate mortgage, should you care when the Bank of Canada hikes the rate?

If you’re like me and have a balance due on a line of credit, whether it’s a straight credit line, or a home equity line of credit, the interest rate may well be at prime plus X%. Mine is prime (4.75%) + 2.25% = 7.0%. When the Bank of Canada changes their rate, the banks can make changes to their prime lending rate.

So, in my case, if Governor Carney puts up the rate by another .25%, the bank has an opportunity to change prime to a new number.  What will that new number be? I have no idea, but I know it’s in the upward direction. That means with every payment I make toward debt reduction, more will go toward interest, and less toward principle. Bottom line, it’ll take longer and cost more to wipe out debt.

If you have any loan in which the interest rate is not fixed, but is calculated as Prime + X%, then prepare to pay more.

Rate hikes may affect the Canadian exchange rate. You may find this helpful or hurtful, depending on your perspective. If you’re a snowbird or cross-border shopper, you’d appreciate a high Canadian dollar. Lots of manufacturers and business have difficulty when the dollar is close to par.

If you have a fixed rate mortgage, you may be interested to know that banks have adjusted their fixed rates three times over the last six weeks or so. That’s without any new announcement from the Bank of Canada. How will a new rate from the Central Bank affect fixed rates when it’s renewal time? If your mortgage is up for renewal in the next few months, better get a quote now that the bank will guarantee for the next 90 days, because everything is on the rise.

My crystal ball is as foggy as ever. I am, however, clear that I’ll pay more to the bank because I have debt. That debt is getting chipped away at a rate I’m proud of. I’m bracing myself for what the rate hike might mean to my budget. For me, a rate hike will hit me three ways: one mortgage at variable, one home equity line of credit (HELOC), and a regular line of credit.  For the record, the HELOC is not consumer debt of any kind, it’s all mortgage.

Governor Carney, I’m prepared to rebalance my budget this summer. Are you ready?


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