Last month’s biggest news bite: the Bank of Canada raised its key interest rate from 0.5% to 0.75%, the first increase in nearly seven years. Canada’s era of ultra-cheap borrowing is beginning to unwind, but how exactly will this affect your finances? Read on to find out, plus more of July’s need-to-know personal finance news:
Interest rate hikes are incremental to prod rather than shock, but some economists predict next Bank of Canada interest rate hike could be come as soon as October. Considering 72% of homeowners say they’d have trouble paying their mortgage if their payments increased by just 10%, borrowers coddled by years of near-zero interest rates should be prepared for the pinch. Global News has a good breakdown of how rising interest rates affect mortgages (both variable and fixed rate), home equity lines of credit, personal lines of credit, car loans, and credit cards.
Interest rates are like avocados: Touch them too early or too late, and you’re in trouble. Government officials tell Bloomberg they’re concerned Bank of Canada interest rates went up too soon, leaving people vulnerable and over-leveraged with the potential to trigger a downturn. Canada’s central bank is independent of the government, and neither Prime Minister Justin Trudeau nor Finance Minister Bill Morneau would comment, but the sources told Bloomberg the concerns stem from Canadians’ voracious appetite for debt, a generation of young people unprepared for higher-cost borrowing, and a potential pullback in consumer spending.
For now, monetary policy’s outside lag means a wait-and-see approach for the overall economy: “Yes, rates are probably a little bit more powerful than they’ve been in the past,” BMO chief economist Doug Porter told Bloomberg. “But they’re not all-powerful.”
Continuing on an upbeat note, the Canadian Mortgage and Housing Corporation (CMHC) issued its third red warning for “problematic conditions” in five markets: Toronto, Vancouver, Victoria, Saskatoon, and Hamilton. As reported by the Financial Post, the CMHC defines “problematic” as some combination of overbuilding, overvaluation, overheating, and price acceleration that exceeds historical norms. The CMHC notes demand is outpacing supply in the rental, resale, and new home markets.
In the three months since the Ontario government introduced 16 measures aimed at cooling the hot real estate market, the average home price in the Greater Toronto Area has declined by nearly $175,000 — however, prices were still up 5% year-over-year in July. In that same period, GTA home sales declined 40%. The latest assessment is based on information from March and doesn’t take Ontario’s measures into account, but a CMHC economist told the Post they expect Toronto to follow Vancouver’s lead: Demand dampened slightly after the B.C. government imposed a 15% property tax on foreign buyers, but constrained supply and a strong local economy has pushed prices back up to where they stood before the announcement.
After years of disastrous wildfires and flooding, Western Canadians will have to endure another pain: rising insurance rates. The Insurance Bureau of Canada tells the CBC that companies set rates by region and adjust based on patterns over time, and that homeowners should expect rates to rise due to “increasing severe weather events.” Severe thunderstorms that ripped through central Alberta in June caused $30 million in insured damage alone. In the meantime, the bureau’s Craig Stewart told the CBC both insurers and government agencies should do more to raise awareness protective measures people can take, and provide incentives for preparedness.
*Cue Zayn Malik song* Honestly, I clicked on this article because of the headline, but it makes a compelling and sensible argument for why the under-35 set should consider life insurance. As reported by the Winnipeg Free Press, a certified financial planner recommends asking yourself this: “Will anyone be financially ‘up-the-creek’ if you die?” What if you become gravely ill or injured and are unable to work? Peace of mind comes with a cost, but term life insurance premiums are relatively inexpensive for young, healthy people with a steady income. It’s far cheaper and way less stressful to have coverage in place before something goes wrong. Even if you’re a couple years out from needing it, it’s best to educate yourself and know your options.
Ratehub.ca co-founder and CEO Alyssa Furtado was on the road this month, speaking at ScaleupFest in Montreal on the challenges of growing a one-person startup to a company of 50+ employees, and at Techweek Toronto on how companies can harness the power of data for practical use in business applications. If you missed it, check out Alyssa’s pitch on Dragon’s Den from last year for more on Ratehub.ca’s growth.
Overnight Lending Rate in Canada