Over the last decade, Canadians have enjoyed some low-interest offers, but the pandemic saw a revision of the rates, reducing them to 0.25%. Increased inflation that rose to 7.7 percent in May 2022 led to another development.
News of the Bank of Canada's recently announced increased interest rates floored other news headlines. The basis points were increased by 2.5% to 100 points. While some people were worried about the consequences, this July 2022 development could offer some benefits for you.
Before we lay out the offers you could get with increased interest, let's discuss primary reasons that could contribute to the rise or fall of interest rates. We'll end this piece on how to protect yourself from the negative trends of increased interest rates.
Reason for Interest Rates Increase
The Central bank of Canada is majorly responsible for policies on money, printing currency notes, and regulating banks' interest marks. Part of its tasks is to keep inflation "close to the two-per-cent midpoint of the one-to-three-per-cent target range." A critical reason for an increase in supply and demand for credit facilities. Other reasons could be related to the country's inflation.
For a long time, interest returns for Canada have been low, offering a soft landing pad for borrowers. It allowed people to collect loans, destroying the culture of saving. This idea is simple. Low-interest rates mean lower dividends on saving accounts and other investment portfolios.
The more Canadians borrow, the bigger the economy becomes. The balance could become unstable if demand exceeds supply and inflation rises beyond acceptable levels. High inflation value made Canada's apex bank rise to the occasion of lifting the rates. Other banks, including similar financial firms, followed suit, which is why you may have noticed an increased rate.
The increase will affect the following areas: line of credit for your home, mortgage, and other facilities related to borrowing. Hence, the interest when you take a loan from the bank could be higher.
Rising Interest Rates BenefitsMany Canadians benefit from this new structure. However, it depends on how you manage your financial portfolio. Here are the guaranteed advantages of high-interest rates.
Control of Real Estate Markets
The price of real estate varies from one province to another. Expectedly, mortgage rates will be affected. Several people could manage their house loans in several ways since the rates were low, spurring an increased competition for houses.
In certain provinces, many residents were able to borrow to pay for the initial mortgage requirement. House hunters could easily get payday loans quebec offer to pay for apartments in the area. This resulted in sellers asking for exorbitant prices, making it hard for people of other financial classes.
With an increase in interest, the prices of houses could become uniform in all provinces. Mortgages will be more expensive and hard to keep up with. Many people will also be unable to pass the rigorous test for Canada's mortgage facility.
Sellers will no longer be able to reduce the asking price, and potential buyers will want to save more. Many financial experts believe this new trend could help control the entire Canadian real estate market. Low competition means anyone with a reasonable repayment plan can hunt for a home without worrying about extorting prices.
Promotion of Savings Culture
Over the last decade, Canada's savings culture has been poor. Hence, with rising rates of interest, you can expect a good return on your savings account. This trend will likely rise as the Bank of Canada has reduced its benchmark rate, allowing all top financial institutions to review and raise dividends on major savings accounts.
The power of compound interest and the regular rates for accounts like tax-free savings (TFSAs), High-Interest savings accounts (HISAs), etc., will boost the culture of saving. In addition, you can purchase Guaranteed investment certificates (GICs) as you learn to save. That certification can boost rankings in mortgage applications as you get investment returns.
According to recent statistics for May 2022, the inflation rate has been at a record high of 7.7% since 1983. This value negatively impacted people's lives. Yes, increased inflation may push Canadians to reduce their spending habits, but essential items like groceries are still affected.
An increase in rates for all interests is essential for inflation control. People spend less when they can't borrow without expecting to pay high interest. Hence, they will likely save the little they have and cut down on unnecessary expenditures.
As we already explained, inflation is often influenced by demand and supply. If the balance is tipped in favour of supply, the price of items can be regulated better or crash to an acceptable standard. A low cost of market goods will reduce the growth rate of inflation.
How to Protect Yourself from Negative Effects of Increased Interest Rates
While it is important to imbibe a savings culture, a hike in interest rates could be disastrous for anyone without sound financial planning. You should understand that a lower interest rate may not allow you to plan well for the future. To save yourself from the harsh realities of increased interest, here are expert tips:
Pay off Loans as Quick as Possible
You should work on repayment if you're currently servicing a loan or debt, since the rates are still low. Low-interest rates mean you're actually paying the principal, whether it is a mortgage or car loan. If you have several loans, starting with the highest is a great idea, and working your way down to the lowest.
Discuss your Mortgage Payment Options with your Financial Adviser
Reach out to your financial provider or adviser on your possible options for mortgage repayment. If possible, try to lock it in a fixed term to benefit from the low rates as a discount. Also, you should consider your options before applying for a new mortgage. Have a good plan on the ground to boost your chances of getting a loan within a period.
Weighing the benefits and cons of a high rate of interest is essential. It gives Canadians a better understanding of their financial state and where to adjust where necessary. You could have a great future for yourself and your family by working around the rates to build a solid investment by saving and reaping the dividends.