BoC rate hike means higher costs for variable-rate loans but better returns for savers - 660 NEWS
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BoC rate hike means higher costs for variable-rate loans but better returns for savers

Last Updated Jul 11, 2018 at 3:00 pm MDT

TORONTO – The Bank of Canada’s latest interest rate hike means higher borrowing costs for consumers with variable-rate mortgages, loans or lines of credit, but it is also good news for savers and future homeowners.

The decision to increase its benchmark interest rate to 1.5 per cent on Wednesday prompted all of Canada’s Big Six banks to raise their prime rates, thereby passing the rate increase along to their customers.

Those with variable-rate mortgages will now face higher interest payments, a concern for many Canadian households that are already saddled with hefty debt loads, said Samantha Brookes, chief executive officer of brokerage Mortgages of Canada.

“Increasing rates just really limit how much they have available to them on a monthly basis,” she said.

The prime lending rate is the rate that banks use to set interest rates for variable-rate mortgages and other loans. Wednesday’s rate hike was the central bank’s first interest rate move in six months and lifted the trend-setting rate to 1.5 per cent, up from 1.25 per cent. It also marked the bank’s fourth increase over the last 12 months and the first time the rate has been this high since December 2008.

The central bank’s move was driven by the strength of Canada’s economy, which it expects will remain resilient despite headwinds from trade tensions with the U.S.

After the central bank’s announcement, Royal Bank of Canada, TD Canada Trust, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank all said they will increase their prime rate by a quarter of a percentage point to 3.70 per cent, effective Thursday.

The rates had previously been set at 3.45 per cent.

The increase raises the cost of borrowing for customers with variable-rate loans, but people with money socked away in savings accounts and guaranteed investment certificates will benefit, said Scott Hannah, the president and chief executive of the Credit Counselling Society.

“It helps seniors who depend on interest income to help fund their retirement expenses,” he said. “And the rate hikes are keeping Canadians focused on the need to curb their appetite for debt and pay down the debt they have.”

Higher interest rates, along with stricter mortgage rules, have also helped to cool down the country’s real estate markets, helping future homeowners, Hannah said. It’s unwelcome news, however, for those looking to renew their mortgages this year, he added.

Overall, the impact of the latest rate hike will be modest for consumers, said Meny Grauman, an analyst with Cormark Securities Inc. The rate hike is in reaction to a healthy Canadian economy, which is beneficial, he added.

Rates are slowly on the way up, but remain relatively low historically, Grauman added.

“On balance, it’s still probably a positive for the average household, for the average business.”

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