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What Higher Interest Rates Mean For You

Posted Jul 14, 2017, 02:54 PM | By Patrick Ercolano

The financial pages were abuzz on July 12 with the Bank of Canada’s (BoC) first rate increase in seven years. What does the move from 0.50% to 0.75% mean to your loans, investments or your travel plans? Read on.

Canada’s economy is healthier, so rates no longer need to be at rock bottom

Back in 2015, in the face of plummeting oil prices and flagging growth, the BoC lowered rates from 1.00% to 0.5%. Now, with an improved economic outlook for the near term and a robust GDP growth rate of 2.8%, Canada’s central bank has revised its forecasts upward.

Reasons for a rate hike

One of the risks of having low rates for an extended period is that inflation can creep up as cheap credit boosts consumption. Although CPI inflation has eased in recent months to 1.3%, they are expecting inflation to move towards its target of 2% next year.

Another risk of cheap credit is that individuals tend to take on more debt. And, related, it makes it easier to service mortgages which, in turn, can feed a real estate bubble. Cheap credit has been an important driver of real estate inflation in Toronto and Vancouver.

We’re still in a historically low interest rate environment

While this rate hike was the first one in seven years, the bottom line is that the increase to 0.75% still leaves us with a very low benchmark rate. In July 2007, the BoC rate had been 4.50%.

The bond market is anticipating another increase of 0.25% rate hike in the next 12 months.

Consumers and investors are unlikely to see much change

Whether you’re a borrower, investor or looking to travel, here are the possible impacts to your wallet:

  • Credit cards

    Credit cards generally charge interest at a high fixed rate, so the Bank of Canada rate increase would not generally affect your credit card interest.


  • Mortgage rates

    If you have a variable rate mortgage, your mortgage rate will go up slightly. For a $500,000 mortgage at 5.00% with a 25-year amortization, a 0.25% increase in the interest rate would add about $72 to your monthly payment.


  • Mortgage Amount

    Monthly Payment at 5.00%

    Monthly Payment at 5.25%

    $300,000

    $1,744.81

    $1,787.75

    $500,000

    $2,908.02

    $2,979.59

    $750,000

    $4,362.04

    $4,469.39

    $1,000,000

    $5,816.05

    $5,959.18

    If you have a fixed rate mortgage, you are locked in at your current rate until your term ends. Upon renewal, any rate increases would apply.

    Home equity lines of credit are often variable rate, so those rates would also rise. These are based on the prime rate which, prior to the rate hike, was 2.70%. Canada’s Big 5 banks, on the heels of the BoC announcement, announced they were raising their prime lending rates to 2.95%.

  • Student loans

    Most recent medical grads have debt. According to the 2016 MD Physician Loyalty Survey, about 46% of medical students expected debt of more than $100,000, and 17% expected debt of more than $200,000.

    Federal and provincial/territorial government loans charge interest based on the prime rate plus a certain amount. For example, the Ontario Student Assistance Program’s interest rate has an “Ontario” portion and a “Canada” portion.

    The former charges the prime rate plus 1.00% and the latter is prime plus 2.5%.  For a loan amount of $100,000, a borrower could prepare to pay an additional $12.33 per month against their student loan.1  


  • Bond investments

    Interest rate increases have a negative impact on bond prices in the short run, but any bond coupon interest generated by your portfolios would invest at the higher rate. It is more a question of magnitude.


  • U.S. dollars

    Higher interest rates can increase Canadian dollar values. In fact, the Canadian dollar appreciated by almost 7% in a month relative to the U.S. dollar—that’s the market anticipating we’re on a path for a few more increases.

    Three hours after the interest rate announcement on July 12, the loonie was up 1.25 cents from its level the day before, to 78.66 cents. For snowbirds and other Canadian travelers looking to buy greenbacks, this provides a slight boost to Canadian spending power in the U.S.


  • Stocks

    With a higher loonie, the flip side is that assets valued in U.S. and other currencies, such as U.S. and international stocks in global equity funds, become less valuable in Canadian dollars.

    Businesses and investors don’t like it when rates go up, as increased borrowing costs detract from growth. While a 0.25% increase is small, business growth is also tied to expectations, so the anticipation of a slightly tighter credit environment in the next several months may weigh on some businesses.

    The relatively short notice by the BoC may not be well received by Canadian stock market. From a portfolio positioning perspective, MD’s view on Canadian equities has been neutral underweight. As the BoC tightens, we will be watching the Canadian stock market closely.

From a personal finance standpoint, slightly higher interest rates are a signal of confidence in the Canadian economy. It’s unlikely that minor increases to the benchmark rate are a big investment concern, and the slight impact on debt payments should be quite manageable. If it helps you with your U.S. travel plans, all the better.

1 Source: CanLearn.ca. Assumes the floating rate loan is repaid over 120 months.

About Patrick Ercolano

Patrick Ercolano, CFA, MBA, is a Portfolio Manager with the Investment Strategy team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.