Are you carrying a mortgage, car loan, or planning a trip down south in the next year? If so, you should probably have been paying attention last week when the U.S. central bank raised interest rates.
The U.S. Federal Reserve, the central bank that controls the money supply of our southern neighbour, raised interest rates last Wednesday for only the second time in the past 10 years. The rate now moves up to 0.75%, from 0.50% — and while those rates determine what American banks pay to borrow from the Fed, they also have an impact on Canadian consumers.
So what could change in the coming months as a result? We break down three ways higher interest rates down south will be impacting your wallet up here.
Get ready for a more expensive mortgage
In Canada, it’s the Bank of Canada that determines interest rates and has the biggest impact on your debt.
But American interest rates also have an influence. Mortgage rates are highly influenced by what the bond market is doing. Right now, bond yields are low and so mortgage rates are as well. But American bonds have recently seen yields begin to creep up — mainly because investors are pricing in a stronger American economy and the possibility of higher inflation.
When inflation goes up, central banks like the Federal Reserve raise interest rates to make borrowing more expensive and to control the price of goods from spiralling too high.
Canadian bond yields tend to follow trends set by U.S. bond yields. And we’ve seen that happening recently. Both the Toronto-Dominion bank and the Royal Bank of Canada have raised their fixed-rate mortgages recently, citing the rise in bond yields.
Next year, economists predict that American interest rates could double from 0.75% to 1.50%, if the current projection by the U.S. central bank holds. That means banks such as TD, RBC, and the rest could be hiking their own mortgage rates in response.
It might be time to sit down and revisit the old fixed-versus-variable debate as a result.
Your trip down south may cost you more next year
It’s that time of year, when Canadians begin flocking south to warmer locales. If you’re opting for an American vacation destination, you might be in for some sticker shock.
Ever since American interest rates went higher last week, the value of the loonie has been falling against the U.S. dollar. There are two reasons for this. One, rising interest rates in the U.S. mean international investors are confident in the country’s economy, increasing demand for American dollars and making the currency stronger.
On the other hand, Canada’s interest rates have been moving downward, as the country’s central bank is trying to keep borrowing cheap to help our struggling economy. This makes the loonie less attractive to international investors and so its value decreases.
Since the decision last week to hike U.S. interest rates, the loonie has fallen from buying 76 American cents to 75 American cents. It might not seem like a lot, but the difference adds up when you’re taking a $2,000 or $3,000 vacation.
Some economists say it’s possible that as Canadian interest rates stay low and those in the U.S. move higher, the loonie could go even lower next year. Possibly as low as 70 cents.
Maybe it’s time to load up your American dollar account.
Is it time to pay off that line of credit?
Luckily, shorter-term loans won’t be impacted by rising American interest rates just yet. So far, it’s just longer-term loans (mortgages), which depend on trends in the bond market, that are getting the sticker shock.
Loans such as personal lines of credit are based on the the target set by the Bank of Canada. Most economists aren’t predicting that the BoC will hike that rate until 2018.
Still, the recent moves should be a wake up call to Canadians that have been binging on all the cheap debt lately. These record low interest rates won’t last forever, and when they go higher, will you be able to afford paying a bigger monthly statement?
It’s time to sit down and evaluate your finances. If you have a mortgage, shop around for the best rate and think about locking it in. It’s shocking that three in 10 Canadians get just one quote when looking for a mortgage — which should never be the case, especially considering it’s the biggest financial decision you’ll ever make.
See where else you can save costs. And use those savings to help pay down any outstanding loans. Because as this month shows, the era of cheap debt won’t last forever.