What Do Rising Interest Rates Really Mean?

The bank of Canada has recently increased its overnight interest rate up to 0.75 percent, which has caused a lot of nervousness and confusion amongst Canadian investors and people in general. We are going to try to dispel some of the confusion by providing some basic information about what this change is likely to mean to you.

First, let’s explain what the overnight rate is. This rate is used to determine the interest rate when banks lend money to each other, which happens very regularly. This does not have any direct impact on consumers itself, but the increase in costs is usually passed down to them from the various banks. With that out of the way let’s discuss what this change is likely to mean to you.

Fixed Rate Loans

For people who have fixed rate loans, whether a mortgage on a house, a loan on a car, or any other type of loan, this interest rate change likely won’t affect you, at least right away. The point of choosing a fixed rate loan is that the interest rate does not change until the loan is paid off or renewed, and so you should not see any changes. However, people getting new fixed rate loans or renewing old ones may find the interest rate will increase. Something that is worth considering however, is that Canadian banks raised the interest rates on fixed interest loans some time ago, so people who are renewing a long-standing fixed rate loan may actually find the new interest rate lower than the old one.

Variable Rate Loans

People who have their mortgages or other loans set up with variable interest rates will see their interest rates increasing soon. This means that borrowing money for any purpose, from home owner ship to paying off lines of credit, will cost more money. However, although the interest rate increase will come very soon, it is likely to be quite minor, and not something to panic about. Still, it is wise to keep an eye on further potential increases when planning your finances.

Credit Cards

Most credit card interest rates will not be affected by this interest rate increase, since the majority of credit cards are based on fixed rates of interest. However, people should still be wary of increasing credit card debt. When it comes to some credit cards, missing too many payments can lead to the interest on the outstanding balance increasing. This is obviously something you want to avoid.

Savings Accounts

One upside to this increase in interest rates is that the interest rate on savings accounts is likely to increase. This means that people who are saving money will find their savings will increase faster. However, this increase will likely be small, and since savings account interest are very low right now, it is not likely to make a significant difference.

The interest rate increase is not likely to significantly impact Canadian consumers at the present time, although people should be aware of potential future increases which may have a larger effect.