Six ways a Bank of Canada rate hike could cost or benefit you

The Bank of Canada is widely expected to raise its trendsetting interest rate on Wednesday.

The hike, if it happens, won’t be large. The central bank usually adjusts rates by just a quarter of a percentage point at a time. But the impact is felt – directly or indirectly – across the economy.

Here’s what borrowers and savers can expect.

Mortgages

A rate hike by the Bank of Canada would filter directly into mortgage payments for anyone with a variable mortgage.

For example, take a variable-rate mortgage at 3.45 per cent on a home worth $666,538, equal to the current national average home price, with a 10-per-cent down payment. A quarter of a percentage point hike would send that mortgage rate to 3.7 per cent, costing the homeowner $82 more a month and $984 more a year, according to estimates by financial products comparison site Ratehub.ca.

For variable-rate borrowers with fixed payments, a rate increase would result in more of their payment going toward interest instead of the principal, and so potentially extend the time it takes to pay the mortgage.

A rate hike would also make for some difficult decisions for people who are getting or renewing their mortgages.

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Most homeowners who had secured rock-bottom rates early in the pandemic have already renewed their loans, saidJamie David, vice-president of mortgages at Ratehub. Butthere are still many facing renewals late this year and in 2027 who are holding on to low rates from 2021 and 2022.

Those borrowers could face “a significant increase in their monthly payments,” Ms. David said.

For anyone mortgage-shopping right now, variable rates are still priced lower compared to fixed rates. But borrowers choosing a variable rate should keep in mind the Bank of Canada could – and is widely expected to – raise rates multiple times in 2027, Ms. David said.

Fixed rates aren’t a much better deal right now. They are priced off bond yields, which have climbedto their highest levels in two years owing to investors’ concerns about inflation, the Iran war and U.S. fiscal policy.

Choosing a fixed rate provides certainty on payments but also means locking in a rate based on today’s gloomy outlook.

Lines of credit

Those who borrow on lines of credit, which have variable interest rates, would also face higher costs after a rate hike.

Canadians with a balance on a home equity line of credit, or HELOC, currently owe just under $59,000 on average, according to data from Equifax. On that amount, someone with a 4.95 per cent rate would be paying around $242 a month in interest alone. A quarter-percentage-point hike would increase that payment by about $12 to around $254 a month.

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Auto loans

Canadians with variable-rate car loans or who used lines of credit to buy their vehicles would also face higher borrowing costs.

The average balance for vehicle auto loans arranged by a dealership was $58,500 in September, according to data from analytics firm J.D. Power. And about a quarter of those loans had negative equity, meaning that the amount owed is larger than the resale value of the vehicle, the numbers show.

Higher interest rates could also make zero-interest or other low-rate financing deals harder to find, since those promotions cost automakers more to offer, said Robert Karwel, an automotive industry expert at J.D. Power.

Savings accounts

The Bank of Canada’s key rate also influences interest rates on savings accounts.

But while banks are often quick to increase the interest they charge borrowers after a central bank hike, they don’t always increase the interest they pay customers on their deposits as fast, or by as much.

When the central bank began its last rate-increasing cycle in March of 2022, all of the big banks mirrored the increase in their prime lending rates within a day. But bump-ups to savings account interest rates were slower and less consistent.

Bond markets

Bond markets don’t wait for the Bank of Canada to announce an interest rate change before reacting. Investors typically anticipate what the central bank might do, meaning much of the impact of a potential rate hike on Wednesday is already reflected in current bond prices.

But there could still be some adjustments in the bond market after a central bank rate hike. For example, if the Bank of Canada signals that interest rates could rise more or faster than investors expected, bond yields could climb further. (Bond yields indicate the returns investors can expect on bonds.)

Another factor is the U.S. Federal Reserve, which also makes a rate announcement on Wednesday. Because Canada’s bond market is heavily influenced by U.S. Treasuries, rate decisions by the U.S. central bank can have an impact on Canadian yields.

The Fed is widely expected to keep rates unchanged this week, but if it signals a desire for more hikes in the months ahead, it could send both U.S. and Canadian yields higher.

When bond yields rise, bond prices fall, which reduces the value of bonds and bond funds investors already own. In 2022, rapidly rising bond yields pushed the FTSE Canada Universe Bond Index down nearly 12 per cent over the year.

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Now, bond yields are climbing again, though less steeply than four years ago. And bond funds are taking another, so far smaller, beating.

The good news? Rising yields also point to higher future returns as investors and funds buy new bonds.

Guaranteed investment certificates

Bank of Canada rate movements have only an indirect impact on the interest that banks pay on guaranteed investment certificates. Like fixed mortgage rates, GIC rates follow bond yields, rather than the central bank’s rate.

But here’s the good news for savers: Because bond markets usually anticipate short-term interest rate changes, GIC rates often start rising before the Bank of Canada actually raises its rate. That what’s happening now, with GIC rates climbing across the board and even some shorter-term certificates crossing the 4-per-cent threshold.