As of June 2022, the Bank of Canada has continued to increase policy interest rates, and the prime rate is 3.7%. While this number is low on a historical level, it is the highest rate it’s been since before the pandemic. The Bank of Canada also announced that the key lending rate is going from 1.0% to 1.5%. So how do these rising Canadian interest rates affect you and your financial situation?

The prime rate is applicable to all sorts of finances: banking, loans, and credit cards, to name a few. Let us break it down for you.

Mortgages

If you currently have a fixed-rate mortgage, you won’t see any difference unless you decide to refinance. When you do, expect to have a larger payment due to the higher rate. If you’re a new borrower, you will be at the current prime rate.

As for variable-rate mortgages, monthly payments will rise, but generally not by much. Despite the recent increases, variable-rate mortgages have traditionally not fluctuated too widely in Canada.

Related article: 7 Canadian Mortgage Questions Answered

Home Equity Loans

When it comes to Canadian interest rates, the terms of home equity loans (HELOCs) are more favourable for lenders than first mortgages, and that’s one reason banks promote them. This is where people will feel the most. 

Rates on home equity lines of credit/loans are tied very closely to the prime rate. Generally, you’ll see the rate for these types of loans as “prime plus 1.5%” as an example. With the rate at 2.7% back in April 2022, your rate would have been 2.7 + 1.5%. Now, you’ll be paying 3.7 + 1.5%.

Auto Loans

This is one area in which rates are locked in for the life of the loan, so interest rate hikes won’t affect your current car payment. That is unless you went with a variable rate for your car. Then it’ll be the same as if it were a mortgage.

For the auto dealers, though, the days of zero-interest car loans are at an end. The bottom line is you’ll have a higher interest rate if you decide to buy a new car.

Student Loans

Like any other type of loan, interest rates on student loans will rise due to the increase. Adjustable-rate loans will rise soonest, followed by a higher interest rate on new student loans.

Credit Lines

Rising interest rates will only affect the credit lines of those who are over-extended financially. For those who hold modest debt, the expert advice is to pay down debt during the next year to avoid the effects of further rate hikes.

It really depends on the terms of your credit line and how the debt is structured as to how much your finances will be affected. Again, those with variable rates will feel the hike much more than those with a fixed rate.

Credit Cards

If you have built up a large amount of debt on your credit card, your monthly expenses may not necessarily rise, but it will take longer to pay off the debt. If your card has a variable interest rate, you’d have similar increases as a HELOC.

Loan consolidation could help in conjunction with making a strict budget and sticking to it. Those who have an emergency fund available will be in the best shape if interest rates continue to rise.

The good news is that the interest rate has risen as a reaction to Canadian economic strength. The first quarter of 2022 showed a GDP growth of 3.1%.  

The effects of the recent rate hike aren’t going to be extreme. It’s the willingness to raise rates that should cause caution when it comes to taking on more debt. There’s no guarantee that the easy lending terms of the past few years will continue. The best advice? Make a concerted effort to pay down debt and not take on any unnecessary financial obligations until it becomes evident whether rates will continue to rise.

Originally posted Jul 18, 2017; updated May 19, 2023

Author: Jeff S.

Proud father and husband. Loves music, Nine Inch Nails, UFC and inbound marketing.