If the Bank of Canada keeps raising interest rates, it’s because the Canadian economy is running too smoothly for their liking! Following Wednesday’s hike, another 25 basis point hike is expected next month, taking our central bank rate to 5%.
But what about the fears of a slide into recession that economists harbored just a few months ago? They seem to have disappeared. But let’s stay tuned. And here’s why.
Few predicted that central bank interest rates would collapse all the way to near 0% at the worst of the COVID-19 pandemic. And since key health measures ended in March 2022, few have predicted that central banks would multiply rate hikes at such a rapid pace.
In addition, the central banks have not yet managed to contain the inflationary pressure within just under 15 months, despite the very sharp increase in key interest rates.
If the overall economy continues to grow well and inflation persists, it is because another large proportion of households are still not saving too much on spending, despite the sharp rise in prices and rising interest rates.
During this time, the less affluent households pull the devil by the tail and go deeper and deeper into debt. They are the ones who increasingly deprive themselves of the necessities of survival.
Unfortunately, aside from the top 10% of course, the rest of the population will also face serious financial consequences. It is unacceptable that prices and tariffs have risen so sharply without putting a strain on the wallets of most households.
mortgages
The mortgage interest rates reported by banks have exploded in just under 15 months.
For every $100,000 mortgage amortized over 25 years, here is the increase in monthly payment caused by the rate hike for the three most popular maturities.
- The one-year term increased from 2.79% to 6.94%, which increased the monthly payment from $233.66 to $696.72 (+$2804 per year).
- For a three-year mortgage, the interest rate rose from 3.49% to 6.40%. The monthly payment thus jumped to $663.77, or $165.03 more (+$1,980 per year).
- The five-year term has a rate of 6.49%, compared to 4.79% in March 2022. The monthly payment is now $669.72, an increase of about $100 (+$1,200 over one year).
Other Loans
Regardless of category, all loans today cost vastly more.
One only has to look at the development of the federal funds rate to see the extent of the “damage” that the dramatic rise in interest rates has caused.
The key interest rate is the interest rate that commercial banks charge their business customers with the best credit ratings. The prime rate also serves as a reference rate from which various variable and fixed rate loans are negotiated.
The policy rate is now 6.95%, compared to just 2.45% in March 2022. This suggests interest rates on various personal and business loans have skyrocketed by at least 4.5 percentage points.
Today, when we borrow money from your credit union or bank, the interest can cost us 11-15%. Of course, that’s less than the 21% or more that we charge on credit card balances or overdrafts generated by our debit cards in bank accounts.
Tip: Pay off your credit card balances and overdrafts as much as possible.
automobile
Would you like to change the car? You should know that the days of car financing at very low interest rates are over.
Buying or leasing a new car now costs 7 to 10% interest at car dealerships.
Advice
- If you haven’t already done so, it would be time to create a budget that fits your means and, most importantly, respects it.
- With mortgage rates on the rise, households that need to renegotiate their mortgage should opt for the short term to give themselves a chance to take advantage of the potential return to lower rates!
- Grab your calculator and do all the necessary calculations to come up with the final bill for the car you want. And ask yourself if you can afford it and if it is really urgent to change your car this year.
Rising interest rates are (also) encouraging
Photo archive, Pierre-Paul Poulin
Laurentian Bank headquarters in Montreal. Laurentian is currently one of the most generous banking institutions when it comes to GIC interest rates.
The Bank of Canada rate hike isn’t just making borrowers unhappy.
It also makes people happy.
win savers
And I mentioned the savers whose bank accounts are full of cash.
After falling slightly in recent months, the interest yield on the range of GICs (guaranteed investment certificates) and time deposits at banks has risen again.
The most generous
The most generous banking institutions are:
- One-year GIC: Laurentian Bank (5.12%); People’s Trust (5.10%); Mandarin (5.10%), Bank EQ (5.10%).
- 3-year GIC: Equitable Bank (4.95%); Home Equity Bank (4.94%); CDN Western Bank (4.92%); ICICI Bank (4.90%); Laurentian Bank (4.75%).
- Five-year GIC: Canadian Tire Bank (4.68%); Equitable Bank (4.70%); CDN Western Bank (4.68%); Home Equity Bank (4.71%); Laurentian Bank (4.62%); Bank EQ (4.65%).
The poorest
The big Canadian banks, on the other hand, are less generous, with yields of 4.55% for 1-year GICs, 4% for 3 years and 3.95% for 5 years.
At Desjardins we offer 4.5% for a one-year savings and 3.85% for three and five years.
A helpful reminder…
Tip: Note that it is generally possible to get a slightly better return from the big banks and desjardins.
How ?
By reminding them of all the banking you do there!
Unfortunately, Épargne Placements Québec has been pretty stingy lately, with a yield of barely 4.25% for the one-year fixed-rate bond and just 3.85% for the three- and five-year bonds.
