As we reflect on the past year, one of the big money stories everyone is talking about is the rise of the key interest rate.
In 2018, the Bank of Canada (BoC) raised the overnight lending rate three times from 1% to 1.75%, pushing up the cost to borrow money too. The commercial banks are currently offering a prime rate of 3.95%, hence, there are a few things you should keep in mind when borrowing in the new year.
Hikes are still coming – just not as fast
Economists are now saying the Bank could raise rates further in 2019. Forecasters previously predicted three rate hikes, with the first coming as soon as January, but now some banks are saying they expect only two. The change in outlook comes after the price of oil fell dramatically in October. Economists then downgraded their forecast, saying a hike in January is highly unlikely, and we should probably look towards hikes in April and October instead.
The BoC still has an appetite to hike rates, even though there may be a delay now. In a recent statement to business executives in Toronto, Bank of Canada Governor Stephen Poloz claimed that to reach the inflation target, the policy interest rate would need to rise into a neutral range “somewhere in the neighbourhood of 2.5 to 3.5 per cent.”
If the BoC remains on target, we could see rates double in a short period of time. In 2019 alone, if rates were to only increase twice, that’s still an extra 50 basis points. This means anyone with a floating-rate loan, like a line of credit or a variable-rate mortgage, will be impacted and paying more to service this money.
Canadians may become financially strapped
This is bad news for Canadians who are already struggling to pay their bills because of high levels of debt.
To add to this, the most recent data from Statistics Canada reports that the household debt-to-income ratio increased to 173.8% in the third quarter of 2018, compared to 173.2% in the second quarter. In other words, Canadians owed nearly $1.74 on every dollar they made.
A report from Environics Analytics also shows Canadians are starting to feel the “sting” of rising interest rates. The report says, “Increasing debt levels coupled with rising interest rates mean the average Canadian household spent $544 more on interest charges in 2017.”
And this is accelerated in places like Vancouver and Toronto were debt loads are higher. This worries credit counselling services that help Canadians get out of debt. In reaction to the Statistics Canada report on household debt levels, the Credit Counselling Society (CCS) put out a statement, projecting that many Canadians may find it difficult to keep up with rising mortgage and other debt payments as a result of further rate hikes.
“If there is a period of slow economic growth in the future, Canadians could face job losses or decreased income putting them in an even worse position to manage their increasing debt levels,” says Scott Hannah, President of the Credit Counselling Society.
For anyone worried about their debt levels, this may be a good time to take a look at how your payments would be affected if rates were one, two, or even three percentage points higher. You can do this by plugging in your debt and interest rate into a mortgage payment calculator. If you have a variable-rate mortgage, talk to your bank about locking in your rate, as five-year fixed rates remain relatively low. You can also be proactive and make lump-sum payments on existing debt. And lastly, try not to take on any more debt until you get your current debt under control.
Housing prices may finally stabilize
For anyone sitting on the sidelines, waiting for housing prices to come down in response to rising rates, they may get the relief they’re seeking in 2019.
According to a Royal LePage Market Survey Forecast, house prices across the country are expected to appreciate at a low single-digit rate in 2019, compared to the double-digit growth we have seen year-over-year. Nationally, the price of a home is forecasted to increase slightly by 1.2% to $638,257.
In the Greater Toronto Area (GTA), the real estate market is expected to make modest gains with home prices also rising 1.3% to $854,552.
In Greater Vancouver, prices are expected to remain relatively flat, as the median price is predicted to increase only 0.6% to $1,291,144. But hey, at least it’s not an increase.
Though not as aggressively as forecasters first expected, rates are still headed higher. Canadians should brace themselves now for money to get more expensive, and all the other broader impacts of a rate hike on the economy – a stronger dollar, lower affordability, pressure on real estate prices and lower business sentiment is on the horizon for 2019.