Interest rates have risen in Canada – Here’s what it could mean for your wallet
As we all know by now, the Bank of Canada raised interest rates by 50 basis points in April, following a 25 basis point increase earlier in the year. It’s sort of a big deal, brought on by the mess that was the early 2020s. the Bank of Canada.
But what does this really mean for young Canadians? Let’s focus on two financial areas that are directly affected by rising interest rates: bank loans and investments.
Why raise interest rates?
Raising interest rates by 50 basis points (0.5%) is not very common. But there are good reasons to raise rates. On the one hand, it helps reduce the effects of inflation for ordinary Canadians.
Inflation is an increase in the price of goods and services. According to Statistics Canada, the consumer price index, a measure of the prices of goods, rose 5.5% between March 2021 and March 2022 — and that excludes oil prices. In March, Canada experienced a month-over-month increase in gasoline prices of 11.8%!
Rising interest rates can also help cool the housing market.
How will rising interest rates affect the housing market?
Simply put, when the Bank of Canada chooses to raise or lower interest rates, every other bank in the country follows suit. Different banks may have slightly different rates, but they will all be close to the rate set by the Bank of Canada. A particularly affected market is the housing market.
When interest rates rise, this includes interest rates on a mortgage. So when interest rates are higher, mortgages are more expensive for long-term homeowners. Thus, high interest rates give potential buyers pause, which in turn may encourage sellers to lower their asking prices.
Conventional wisdom suggests that it’s best to take out a loan – like a mortgage – when the interest rates you’ll be charged are low. On the other hand, it may be better to invest when inflation rates are high.
How will rising interest rates affect investments?
When you make an investment, the hope is that your money will earn interest, that is, it will grow. There’s a whole world of investments out there, but for the purposes of this article, let’s focus on Guaranteed Investment Certificates (GICs).
Fixed-rate GICs are a low-risk way for Canadians to invest money. Basically, you invest money at a fixed rate (meaning the interest rate on the GIC won’t change) for a specific period of time. These GICs are guaranteed to grow at the fixed rate, hence their name.
The fixed rate of a GIC will depend on the interest rate set by the Bank of Canada.
This means that, for example, people who invested in a fixed-rate GIC when the interest rate was lower might get a lower payout than people who waited until now to invest.