Bank of Canada's announcement on the prime lending rate: Why you should care

Life is busy. You’re working. Maybe you have a family. You’re trying to enjoy pockets of time when you can. You barely have enough time to get the sleep you need, let alone follow the high-level workings of the Bank of Canada. But whether you’re paying attention or not, the Bank of Canada makes decisions that have a big impact on your finances. That’s right, we’re talking about the prime lending rate.

A hot topic in economic news these days is the question of when the Bank of Canada will announce whether they are going to change the prime lending rate. For consumers, the more important question is: how will this announcement affect you?

What is the Bank of Canada?

Simply put, the Bank of Canada is Canada’s central bank. It’s a financial institution that decides on monetary policies that affect the entire country, it issues our national currency, the Canadian Dollar, and it operates independently from any government. Its purpose is “to promote the economic and financial welfare of Canada,” as per the Bank of Canada Act. One of the many tasks that fall under the authority of the Bank of Canada is deciding on the prime lending rate.

What is the prime lending rate?

The prime lending rate is the interest rate charged to commercial banks across Canada. These banks will then charge their customers an amount on top of that to determine the end user’s interest rates for different loans including mortgages, credit cards, and personal and business loans.

During 2022 and into 2023, there were significant and frequent increases in the prime lending rate. This rate is meant to represent the overall economic conditions of the country. It wasn’t that long ago the prime lending rate was 0.25% and now it has increased to 5.0%. For anyone paying attention to the ripple effect of the prime lending rate, there is a collective sigh of relief whenever the Bank of Canada announces that there is no change to the rate. There is even some slight hope it could go down, even just by a little.

This makes a difference in your life because if you have a credit card, a mortgage, a line of credit, or any kind of personal or business loan, your interest rates could be affected by the prime lending rate.

Credit Card Debt

Many credit cards already charge a high interest rate of 20% to 25%. At times, these credit card rates have even increased by 1% or more. If you can pay off your balance each month, then there is no interest charge to worry about and any change in interest rates will have no impact.

As other expenses continue rising higher and higher such as groceries, gas, clothing, and utilities, it may put additional strain on your credit card. As your daily living costs increase, it may mean using credit cards to pay for those monthly expenses while leaving you unable to pay off the balance each month. If you find yourself in a position where you’re unable to pay off your balance each month, rising interest rates could have a notable impact on your financial well-being.

Mortgages

To the average consumer, any change in the Bank of Canada rate has the biggest impact on your mortgage interest rate. Those with variable-rate mortgages experienced changes in their rate as soon as it happened. It is also estimated that 2 million or more mortgages will renew over the next 2 years. This will involve mortgages that currently enjoy a fixed low rate of 2-3% possibly resetting to 5-6% or higher. That can add as much as $1,000 or more to the monthly mortgage payment depending upon the size of your mortgage.

If you find yourself in that situation, here are some strategies to deal with rising mortgage costs:

• If the monthly cost is the higher priority, consider increasing the amortization of the mortgage. It can help reduce the payment, but you need to be aware it means you will be paying more interest over the long term and will take longer to pay off the mortgage.
• If you are currently paying your mortgage once per month, consider making more frequent payments such as weekly or bi-weekly. This would only be recommended if that matches with how you are paid at your job.
• If the concern is your ability to handle any further rate increases, consider a fixed-rate mortgage upon renewal. The rate may be higher, but it would give certainty of the amount to be paid over the long term.

Avoid payday loans

Unfortunately, income is not rising at the same rate as the cost of living. This is leaving many people short of funds each month. Some people will turn to payday loans with the idea it will only be a temporary need. However, the financing costs of payday loans can reach 50+%. Often, you will need another payday loan to refinance the old loan. It creates a cycle where there is no escape. Avoid payday loans at all costs. If you do find yourself caught in that cycle, it may be time to reach out to a Licensed Insolvency Trustee to review your options, including Bankruptcy or a Consumer Proposal. Each is a viable choice for someone experiencing severe financial hardship.

Get back on track

If you find yourself falling further and further behind, contact the financial experts at MNP. Our Licensed Insolvency Trustees can evaluate your options with a free confidential consultation to help you get back on the right track. For example, a Consumer Proposal can help balance your monthly payments and reduce your debt to a manageable amount. You will receive a recommendation that best fits your situation.

If you have any questions about the prime lending rate or your own finances, reach out to our team of advisory experts for a free consultation.