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Burning questions about those interest rate changes.

You’ve probably been hearing a lot lately about the Bank of Canada’s interest rate changes. When Canada’s central bank raised its key interest rate to 5% on July 12, 2023, it marked a 22-year high.

These changes have made it more expensive to take out and pay back certain types of loans. But when it comes to how they’ll impact your finances, it’s different for everyone. Let’s address some of the most common interest rate questions. 

Why have interest rates gone up so much?

The Bank of Canada’s rate hikes are intended to cool down the inflation rate, which hit a 39-year high in 2022. The goal is to get people to slow down their spending by making it more expensive to borrow money through products like a mortgage, line of credit or other loans with variable interest rates. The Bank of Canada tries to keep inflation at 2% – a far cry from the soaring 8% it hit in early 2023.

But if it doesn’t quite feel like an economic happily ever after yet, it could be because the impact can take about a year to a year-and-a-half to play out. In the meantime, consumers find themselves crushed between inflated prices and high-priced loans.

Will credit card interest rates change?

While the Bank of Canada interest rates can have economic ripples that might eventually influence credit card companies to change their rates, it’s not a direct correlation. Credit card interest rates, including purchase, balance transfer and cash advance rates, are generally fixed, which means they’re determined by your credit card provider. That way, they typically don’t just change overnight like a card with a variable interest rate might.

Variable rate credit cards have interest rates that go up and down with a financial institution’s “prime rate,” which takes the Bank of Canada’s rate as a base and then tacks on a bit extra. But unless you’ve opted in for a card that rides those economic uncertainties, you probably don’t need to worry about your interest rate changing right away.

According to the Financial Consumer Agency of Canada, a standard credit card interest rate is 21%. Your own rate could be higher or lower depending on the type of card you have. For example, if you’re building credit your card might have a higher rate, as the provider is giving you access to credit you otherwise might not have. Or, you might choose to pay a higher annual fee in exchange for lower interest rates.

Which loans are impacted by rising interest rates?

Loans with variable interest rates can be unpredictable, as their interest rate goes up and down along with the Bank of Canada’s key rate.

  • A line of credit typically has a variable interest rate that fluctuates alongside the Bank of Canada’s rate, but other factors, such as your credit score, may contribute to how much interest you’ll have to pay.

  • A personal loan, which you might take out to cover a specific purchase like a car repair or even to consolidate your debt, can have a variable interest rate, paid in regular instalments. This rate is tied to the Bank of Canada’s rate. However, you can also get a personal loan with a fixed interest rate. In times of economic uncertainty, a fixed loan makes it easier to stick to a budget, because your interest rate will be the same from month to month.

How do interest rates impact mortgages?

The interest rates on variable-rate mortgages rise and fall with the Bank of Canada’s key rate, while fixed-term mortgages aren’t directly affected.

  • Variable-rate mortgages are among the most likely to change. But lately, less than 20% of mortgages are variable rate as homeowners just aren’t willing to stomach the risk.

  • Fixed-term mortgages lock your interest rate in for a period of time. Short-term fixed mortgages have been the most popular recently as your rate stays the same for up to five years before you renegotiate (hopefully when rates have dropped). Fixed-term mortgages aren’t directly impacted by interest rate changes, but if your term is coming up soon, that’s not the greatest news. Chances are you’ll be looking at a higher rate.

Will higher interest rates affect the cost of rent?

Interest rate hikes don’t directly impact the price of rent, but landlords might decide to pass those extra mortgage costs along to their tenants – just one of many reasons why housing costs are going up. Check out how much a landlord can legally raise the rent in your part of the country.

Economic changes aren’t always easy to predict. But the more you know about how your finances work, the better you’ll be able to plan for the future. To get answers to even more of your everyday credit questions, check out our blog.