Breaking down the Bank of Canada’s interest rate increase: What does it mean for Canadians with debt?

Update: On September 6, 2023, the Bank of Canada held the current interest rate of 5.00%.

As of July 12, 2023, the Bank of Canada has raised interest rates by another 0.25%. While this might sound like a small increase, it could have a big impact on your finances, specifically your mortgage and other types of debt.

To help you understand the implications of an interest rate increase, we’re breaking down why the Bank of Canada made the increase and what it might mean for you.

Why did the Bank of Canada raise interest rates?

The Bank of Canada’s role is “to promote the economic and financial welfare of Canada.” One of their primary functions is to control the rate of inflation within the country. Inflation is how we measure increasing prices for goods and services each year. The Bank of Canada works to keep our inflation rate at about 2%. As of January 2022, our inflation rate far exceeded this when it reached 5.1%. Now, we’re experiencing the effects of the jump in inflation every day through the rising costs of groceries, gas, and other necessities. The major tool that the Bank of Canada uses to control or “cool” inflation is to raise the interest rate.

What does a higher interest rate mean for me?

The largest impact of rising interest rates will be on your mortgage and other types of debt. The way that it impacts your debt, however, depends on whether your debt has a variable or fixed interest rate.

• Variable interest rate: If your debt has a variable interest rate, it means that the amount of interest varies (hence the name) based on the Bank of Canada’s rate. If the Bank of Canada’s rate goes up, then your payments go up; if the rate goes down, then your payments go down. So, if your debt has a variable rate, you can expect to see your payments increase in the near future.
• Fixed interest rate: If your debt has a fixed interest rate, this means that the amount of interest does not change based on the Bank of Canada’s rate. For debt that has a fixed rate, nothing will change in the short term. If your debt has a term and a renewal (for instance, a fixed rate mortgage), the payments will stay the same until the term ends. When it comes time to renew your debt, your interest and payments will be determined at the time of renewal. That means that as rates increase, even fixed rate debt will eventually get more expensive.

If you don’t know whether your debt has a fixed or variable rate, you can check your borrowing agreement or ask your lender.

How much are interest rates going up?

The Bank of Canada has raised interest rates by 0.25%. It’s not a big increase – but it won’t end there. Experts anticipate that the Bank will continue with several interest rate hikes in the foreseeable future, which will likely end in around a 2.00% total increase.

In Canada, the average mortgage balance and home equity line of credit (HELOC) balance has been increasing. In 2021, the average new mortgage in Canada was $372,000, and the average HELOC balance was approximately $70,000. With loan amounts this big, even small increases in the interest rate will add up. This is especially difficult for Canadian households who have been struggling to make ends meet. Many Canadians live “paycheque to paycheque,” and already struggle with the high cost of everyday items; for them, this increase will be a difficult financial burden to navigate.

If you are struggling with your finances and would like to discuss your budget or how to manage your debt, reach out to Grant Thornton Limited for a free, no-obligation consultation.