If like many Canadians, you have been pleased time and time again that the prime interest rates set by the Bank of Canada (BoC) have continued to go down, evening reaching all time lows over the course of the last year.
Since the BoC’s interest rate can have many implications for borrowers who are looking to obtain credit such as a car loan, a mortgage, as well as other types of personal loans, it can ultimately dictate the cost of borrowing. Furthermore, this interest rate will also impact the amount of debt individuals are able to pay off, as well as the how much debt they might accumulate.
Therefore, with all of these implications for Canadian borrowers, a realistic question for them to ask is of course, what will happen if the Bank of Canada Changes their interest rates??
Fixed versus Variable rates:
Depending on the type of credit you have, if your loan comes with a fixed rate, meaning the interest rate remains the same throughout the duration of the loan term, in the event the bank raises the prime rates, then your loan payments will not increase. On the other hand, if the interest rates fall even further, then your payments will not decrease as well.
With a variable rate however, the same can not be said. With a change in the prime rate, the interest rate of your loan will typically rise and fall alongside the rate set by the BoC. Of course, this fluctuation will have financial implications for your overall loan and credit payments.
Specific to mortgages, since they are large in nature, the interest you will be paying, in the event the rate increases will be rather significant. In turn, this could mean for those with a lot of debt, their debt could shoot up even further.
Existing Borrowers versus New Borrowers:
Since interest rates can closely impact the success at which a borrower can pay back their loan, the nature of the rate can directly influence a borrower’s decision to take on a mortgage or another loan at that precise point in time.
For example, with an increase in interest this could mean that for those borrowers who are looking to take on a new loan, this may mean that the repayment of the loan will be much more challenging compared to if the interest rate stayed the same or in fact decreased.
At this juncture, interest will be higher regardless of whether the loan carries a fixed or a variable rate. Either way, both rates will be higher from the get-go – however with a varied rate – if the rate were to decrease, this could work in the borrower’s favour. Alternatively, with an increase in rate – again the interest on these loans will also likely increase as per the increase made by the BoC.
While, it is true that there are many contradictory courses of actions when it comes to choosing to take out new credit or to opt for a fixed versus a variable rate, borrowers can rely on the recommendations of financial experts who can anticipate the direction the prime interest rate will take in the near future.
Looking at your personal financial situation, can you afford to continue to pay a loan should the interest rate increase, is also a method of choosing which decision is best for you. As a borrower, thinking ahead will serve you well, not to mention also following along with the economic climate and the expert predictions made on the topic of future interest rates.
With a lot of personal debt, such as credit card, car loans, and even mortgages – ultimately, borrowers will need to monitor their debt levels closely and competently – even seeking out help from financial experts, in order to ensure their debt does not become too unmanageable. These financial professionals can also help to inform you of the likelihood that the Bank of Canada will change their interest rates moving forward.