Prepare to pay more for your loans

The Bank of Canada raised its key rate yesterday to 1.75%. Many people will suffer more.

At a time when one in three Canadians lives from paycheque to paycheque and the average household debt ratio exceeds 169% (they owe $ 1.69 for every dollar they earn), each rate increase also minimal, has dramatic repercussions for hundreds of thousands of borrowers.

How it works?

It is good to know that the economy is running at full speed and we are in a situation of full employment, right? The consequence is inflation (a general rise in prices and wages). She has been playing in the 2% for months. However, the Bank of Canada is responsible for curbing inflation to prevent the economy from overheating (too high inflation decreases consumer purchasing power) by raising its policy rate. She did it five times in 18 months and warned that further increases are almost inevitable.

The key rate is the interest rate at which major financial institutions lend money to each other for a day. Normally, when this rate varies, banks and caisses populaires adjust the rates they apply to their clients' mortgages and lines of credit accordingly. It therefore costs more to borrow.

Less money in your pockets

Yesterday, the Bank of Canada raised its rate by 0.25 percentage points. Normally, financial institutions follow suit in a few hours, raising their prime rate (which they give to their best clients). The average consumer pays a premium rate based on his credit rating and the state of his personal finances at the time he took out his mortgage, line of credit or personal loan.

Specifically, a person who has a balance of $ 360,000 on the mortgage of his condo, at a rate of 4% amortized over 25 years, has a monthly payment of $ 1893.67. With an increase of 0.25%, his payment increases to $ 1942.78, a difference of $ 49.11.

For a $ 30,000 line of credit at a rate of 10.5% (5 year term), the monthly payment increases from $ 641.51 to $ 645.07.

Do you think these increases are not terrible? Think again. I know ACEF budget advisers who are going to have a lot of work in the coming weeks, to help people who are being squeezed because they can not afford to repay their debts.

Advice

Do you renew your mortgage soon? If this kind of rise prevents you from sleeping, choose a fixed rate over several years, because the economy shows no signs of slowing down.

Want to buy a property in the next few months? Ask your bank for a pre-authorization loan that will freeze your rate over several months.

Are you financially tight? Make yourself a budget! Free tools for doing this are available at www.budgetenligne.net.

Use the Mortgage Calculator from the Financial Consumer Agency of Canada.