Another Benchmark Rate Hike by The Bank of Canada

27 Dec

Another Benchmark Rate Hike by The Bank of Canada

In October, the Bank of Canada raised the benchmark interest rate by 1.75%. That’s the fifth time that the rate has been increased a quarter point in a few months.  It has reached the highest it has been in a decade, which is spelling some trouble for Canadian borrowers.

To understand what this means for the housing market, you need to understand what a benchmark rate is, how it is determined and what homeowners should expect going forward.

What is a Benchmark Rate?

The benchmark rate determines the minimum that the big banks in Canada charge each other for short-term loans. Even though it is a rate that dictates the relationship between financial institutions, it does trickle down to customers. Most banks use the benchmark rate to calculate the variable mortgage rate and the rate for savings accounts.

The Recent History of the Benchmark Rate

Borrowers had a few years to enjoy a stable rate as the Bank of Canada kept the benchmark at record lows to spur the economy after the market downturn in 2008.  Now that the economy is healthier, the rate naturally must increase. Borrowers will continue to experience the impact but overall the rate is at a relatively safe level considering the Bank of Canada’s recent activity.

The Impact on Borrowers

Borrowers are already feeling the pinch. Because of the benchmark rate increase, Royal Bank, BMO, CIBC and TD all raised their prime lending rates to 3.95%. The remaining banks like Scotiabank should be raising their rate before the year is over.

It is now more expensive for Canadians to borrow, which isn’t a positive for most people. The silver lining, though, is that fewer people being overextending on a loan or loans can result in less household debt.

Like anything related to the Bank of Canada, things change fast. Canadians have gotten use to benchmark rate increases over the last few months but that trend might not extend into 2019.  For now, Canadians should continue to borrow for the right reasons—buying property, education or business opportunities—but staying a bit cautious can’t hurt in the long run.