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Bank of Canada Rate Hikes Explained

How Will Rising Rates Impact Your Finances?

August 31, 2023

In July of this year, The Bank of Canada increased its target for the overnight rate to 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. This comes only weeks after its early June decision to raise it to 4.75%. Today, we'll be talking about this recent rate hike and how it might affect your finances. So, let's dive right in!

The Bank of Canada often raises interest rates to manage the economy and maintain stability. These rate hikes are implemented when the central bank believes that the economy is growing at a fast pace, which could lead to inflation. By raising interest rates, they aim to slow down borrowing and spending, encouraging individuals and businesses to save and invest instead. This helps to prevent prices from rising too quickly and ensures the economy stays on track. This makes borrowing more expensive, reducing consumer spending and cooling down the economy. Through this measure, the central bank can effectively manage inflationary pressures and ensure long-term economic growth. Remember, the Bank of Canada's actions are always in the best interest of maintaining a healthy and stable economy for all Canadians.

If you have a variable-rate mortgage or any other debt tied to the prime rate, you can expect to see an increase in your payments. Since borrowing costs rise, your lender will adjust your rate accordingly. On the bright side, savers may rejoice! Higher interest rates mean that you'll earn more on your savings accounts and fixed-term investments. This could be a great opportunity to grow your nest egg or achieve your financial goals faster.

Here are some ways to maintain financial stability despite the impact of rising policy interest rates and inflation on your finances:

  • If you find that the price of food and gas has increased in the last year, it could be a good time to re-evaluate your priorities and update your budget.
  • If you’re planning to buy your first home, you might have to rethink your budget for the first few years because rising mortgage rates may change how much you can borrow. Click HERE to see the mortgage options YNCU offers.
  • If your mortgage rate expires in less than 6 months, an early renewal may be advantageous to secure a lower rate before the next increase, should the rates increase more, without penalty. For a loan coming with a longer term, you will need to take into consideration the penalty fees.
  • If you have a variable-rate mortgage, your monthly mortgage payments may increase. Fixed-rate loans will only be affected at the time of your renewal.
  • → Make an informed decision about which rate you choose
  • If you have savings at your disposal, this could be an opportunity. When stocks are down, it's a good time to buy. In addition, some investments, such as guaranteed investment certificates (GICs), see their interest rates rise during a period of rising rates. GICs offer a guaranteed rate of return, so are a safe investment choice, even when the market feels unpredictable. Click HERE to check out YNCU’s current lending and investing rates.
  • If you’re concerned about your investments, discuss them with your financial advisor. Above all, don't make hasty financial decisions. In a long-term strategy, it’s normal for the value of certain investments to fluctuate. Remember that just because rates are rising, or markets are volatile for a period, doesn't mean your long-term financial plan has to change.
  • If you have debts, such as a line of credit, a personal loan, or a credit card balance to repay, prioritize paying off the ones with the highest interest rates first.
  • If you want to increase your cash flow or build an emergency fund, you may want to postpone certain projects, like a big trip or renovations.

Of course, it's always wise to review your personal financial situation with a professional advisor who can provide tailored advice based on your specific needs. They can help you determine whether any adjustments need to be made to your budget or investments. While rate hikes might bring some challenges, they also offer opportunities. By staying informed and taking proactive steps towards managing your finances, you can navigate these changes with confidence.

For all your general financial inquiries and how you can plan out your financial goals, come and talk with an advisor at your YNCU branch!

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