TORONTO-
The Bank of Canada on Wednesday raised its key rate by one percentage point, the largest hike the country has seen in 24 years.
The move signals the central bank will take a more aggressive approach to tackling inflation, which is at a 39-year high of 7.7% and has made groceries, vacations and other purchases more expensive.
The rise to 2.5% will also affect mortgages, loans and spending habits.
MORTGAGES
Commercial banks and other financial institutions generally raise or lower their mortgage rates in conjunction with interest rate hikes by the Bank of Canada.
This means those with variable mortgages will be affected and anyone whose mortgage rate is up for renewal is likely to experience “sticker shock”, said Laurie Campbell, director of customer financial wellbeing at the company. Bromwich + Smith consultancy.
“It’s going to be a situation where a lot of people are going to wonder if they can still afford that house,” she said.
“We’ve seen 10 years of continuous housing increases and the housing market go astronomically crazy. Now it will undoubtedly stabilize with these increases in interest.”
During the COVID-19 pandemic, she’s seen people dipping into their home equity, so some have a traditional mortgage and a second mortgage on their property. If there is a correction in the housing market, she fears they will end up owing more on their home than the property is worth.
LOANS
People who have variable rate lines of credit, personal loans or car loans are all affected by interest rate increases.
“A lot more of their money is going to go to interest and they probably want to increase their payment, if they can, to cover that and make sure they get rid of that debt quickly,” Campbell said.
This will not be an easy task for some Canadians. Campbell said she had seen studies indicating that Canadians were more in debt than ever before, and that for every dollar someone in the country earned, they owed an average of $1.86.
“Individuals are really going to have to get down to business and figure out how to deal with all this debt,” Campbell said.
If you can’t repay your debt and your financial situation isn’t about to improve, she recommends seeking help from a licensed insolvency trustee.
EXPENSES
Between inflation, supply chain issues, shortages, and rising prices, most goods and services are getting more expensive.
However, as pandemic-related restrictions ease, people are eager to venture out of their homes, get together and partake in their favorite pastimes again.
“I guess in the short term people will continue to spend because it’s summer, people like to be outside and enjoy that time of year,” Campbell said.
“However, I say this with caution. I think we’re going to see increased debt levels and there will be a reckoning where people will have to cut spending because inflation is really killing us and making it really hard for us to make ends meet. .”
This report from The Canadian Press was first published on July 13, 2022.
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