What is the Impact of Canada’s Interest Rates Increase? 2022 Expert Guide

by | Jan 17, 2023

Do you know that the Bank of Canada raised interest rates one more? On December 7th, 2022, the interest rates increased by 50 basis points to 4.25%. Depending on whether you’re a borrower or a saver, an increase in interest rates will affect you. Yet, it would be best if you were prepared in either case.

So you must know how the rise in interest rates will affect people and households. And what would be the best action to take in a financial emergency?

We at Yogi & Associates want to assist you in focusing on the impact this will have on your debt and spending. So, read this expert guide if you are curious about how rising interest rates may impact your budget. Or want to learn more about saving. Also, if you are stressed about gathering your corporate tax information, we can assist you!

1. What is an Interest Rate?

The amount of interest due each period expressed in terms of the amount lent, deposited, or borrowed is known as an interest rate. The total interest on a borrowed sum is determined by the principal amount, the interest rate, the compounding frequency, and the time the loan took place.

2. Benefits of Increases In Interest Rate

Reduction in Inflation

Rising interest rates decline the inflation rate. When interest rates rise, spending decreases and supply starts to exceed demand as consumers pay less. As a result, producers and retailers cut prices to attract customers to purchase more goods. Thus, costs fall, and inflation lowers down.

Increased Growth of Savings Accounts

When interest rates rise, it is excellent news for savers. The power of higher interest rates increases savings growth, encouraging more savings.

“The Interest rates act as a link between income value and capital value.” -Irving Fisher.

The housing market becomes less crowded

The cost and manageability of mortgages will increase as interest rates rise. Potential homeowners may find it challenging to pass Canada’s mortgage stress test. Some home purchasers will postpone their plans due to rising costs. The experts believe that this increase in interest rates will help stabilize the housing market.

3. What Do Homeowners Need to Know About the Rate Increase?

Can I handle that debt or that new loan at a higher interest rate than I’m receiving today? This is a question you should ask yourself. Especially before renewing your mortgage, purchasing a home, or taking out a loan.

Fixed Mortgage Rate

Your monthly payments may increase if you have a fixed-rate mortgage. If your new repayment period is small, you should renew your fixed mortgage due to increased interest rates. 

For more information about the fixed mortgage, view our blog, What is a Fixed Mortgage Rate in Canada? 2022 Easy Guide.

Variable Mortgage Rate

You will be affected differently by this most recent rise in interest rate if you have a variable mortgage rate. Payments will also rise within the next month to reflect the increased prime rates.

Fast Fact!

Although inflation has dropped from its peak, it is still too high. The Bank of Canada anticipates a drop in inflation to 3% in late 2023 as the economy adapts to higher interest rates. As the effects of high commodity prices and supply disruptions fade, inflation will go back to 2% by 2024.

Some homebuyers now face tougher stress tests

Federal rules state that you must pass a stress test if your down payment is less than 20% when purchasing a new house. Due to this increase in interest rate, some homebuyers may find the stress test a little more complicated.

4. How Can You Get Ready For an Increase in Interest Rates?

Particularly for homeowners who have benefited from years of low rates, this most recent increase is noteworthy. These four steps can help if you’re thinking about how to manage debt when there is an increase in interest rates:

1. Understand the difference between fixed and variable-rate mortgages.
2. Get a “fresh” look at your budget.
3. Prepare for a possible decrease in monthly income.
4. Consider setting aside some money for savings or retirement.

Final Thoughts!

You can start making changes to help yourself overcome any financial obstacles. For this purpose, you can get the help of Yogi & Associates. We are aware of the current economic climate. That’s why helping you to reach your financial objectives is our top priority. Thus, if you need assistance on what to do next on increasing interest rates, seek guidance from our experienced team at Mississauga

Moreover, Yogi & Associates has the experience to handle your bookkeeping. Because we have worked with companies exactly like yours. And we are popular in Mississauga and Brampton for our bookkeeping services. So contact us today!

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