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Canadian Borrowers Await Interest Rate Outcome
Canadian Borrowers Await Interest Rate Outcome

Canadian Borrowers Await Interest Rate Outcome

Canadian Borrowers Await Interest Rate Outcome

For millions of Canadians, whether or not the Bank of Canada increases interest rates Wednesday isn’t merely a financial page headline. It’s matter of money out of their pockets.

July’s single quarter-point rise, the first in seven years, was easy to set aside as a quirky exception. But the notion of a second increase within two months suddenly changes the game, CBC reported.

In the world of compound interest, especially for consumers who have pushed borrowing to the limit, each quarter-point rise increases the pain exponentially.

Not only would another quarter-point increase double the extra cash borrowers must scrape together to make their monthly payments, this time it is hard to ignore the writing on the wall that we are watching a trend.

US rate increases are ominous for Canadian borrowers. US Fed chief Janet Yellen’s repeated warnings—passed on by CBC News—were bound to have a long-term impact on the cost of borrowing in Canada.

But when the Bank of Canada moves, the effect is much quicker. If you are one of the millions of Canadians who have a line of credit or a variable-rate mortgage where the interest rate is pegged to prime, the impact will be likely be immediate.

Those with fixed-term mortgages, or things like car loans where the rate is set by contract to cover the entire borrowing term, have a pad. They have time to think about where to find the money to pay higher rates once they renegotiate their mortgage or buy a new car.

And a rate rise will affect the price of houses. Just as higher interest rates push down the price of existing bonds, higher mortgage rates should have a similar effect on houses.

“Every single rise, yes, that will mean house prices are going to drop,” says realty consultant Ross Kay from Burlington, Ont. “It’s simple math. There’s no way to avoid the math.”

However, he says the rules imposed by the Office of the Superintendent of Financial Institutions in anticipation of a series of rate rises like the one that could continue this week, have already had a bigger overall impact on the housing market.

In theory, rising interest rates, whether they come now or later, will hit consumers at many levels. That’s because the cost of borrowing will rise not just for consumers but for businesses too.

However the slowing effect of rate rises is far from instant. Research has shown the full effect of a rate hike is not seen in the real economy for more than a year.

 

 

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