Why Interest Rates Go Up & Down in Canada?
Interest rates have been rising in Canada for more than a year now.
And if you’re a home buyer or looking to renew your mortgage, you’re probably wondering how that will affect your finances.
The good news is that interest rates are still very low by historical standards. The bad news is that they’ll probably keep rising. And that could mean higher monthly payments and less money for retirement savings.
Here’s what you need to know about interest rates — and how it could affect your finances in the future.
What are Interest Rates?
Interest rates are the price of borrowing money. When you take out a loan, your lender charges you an interest rate based on how risky it thinks lending to you is — and how much cash it has invested elsewhere on its balance sheet.
In other words, if the lender thinks there’s a good chance they won’t be able to collect on the outstanding balance, they’ll charge more interest to compensate themselves for taking on that risk. What happens when the Bank of Canada raises or lowers interest rates?
When the BoC raises rates, it’s called tightening monetary policy. Conversely, when it lowers rates it’s called loosening monetary policy.
What it means when Interest Rates go Up?
Interest rates are the price of borrowing money. When you take out a loan, your lender charges you an interest rate based on how risky it thinks lending to you is — and how much cash it has invested elsewhere on its balance sheet.
In other words, if the lender thinks there’s a good chance they won’t be able to collect on the outstanding balance, they’ll charge more interest to compensate themselves for taking on that risk. What happens when the Bank of Canada raises or lowers interest rates?
When the BoC raises rates, it’s called tightening monetary policy. Conversely, when it lowers rates it’s called loosening monetary policy.
What it means when Interest Rates go Down?
When the Bank of Canada lowers interest rates, it becomes cheaper for businesses to borrow money and so they may hire more workers and spend more on capital projects. This will lead to more economic growth which allows for more consumer spending which creates jobs for workers who were previously unemployed because there was not enough demand for their skillset.
Lowering interest rates also stimulates the housing market by making mortgage payments cheaper and easier to afford which leads people to buy homes or invest in rental properties if they don’t own one yet
Why do Interest Rates go Up & Down?
The Bank of Canada has a mandate to keep inflation low, stable and predictable. If inflation is too low, it can lead to deflation (a period of falling prices), which can be damaging for an economy by leading consumers and businesses to hold off on making purchases. If inflation gets too high, it can lead to higher prices for goods and services — which in turn can lead to wage increases that squeeze profits out of businesses and lead them on a slippery slope toward bankruptcy.
The Bank of Canada uses two main policy tools — changes in its overnight lending rate (the rate at which banks lend money to each other) and changes in its target overnight deposit rate (the rate at which it lends money directly to financial institutions).
In a Nutshell
The BoC also sets targets for inflation and employment levels. If the economy is growing too fast and inflation is rising, it will raise interest rates to cool things down. If the economy is growing too slowly or falling into a recession, it will lower interest rates to stimulate spending.
It’s No Time to Panic
Interest rates are a basic fact of life in Canada. When they go up, it costs us more money to borrow. When they go down, we get to borrow more cheaply.
As you might expect, the Bank of Canada is charged with overseeing the interest rate environment for our country. The bank makes decisions about how much money to print and how much to charge for loans based on where it thinks interest rates will be in the future.
The Bank of Canada’s decision about what to do with interest rates is always subject to change as new information comes in. This is why we have an economic cycle — when economic activity picks up, so does inflation, so the bank raises rates to cool things down and fight inflation. When activity slows down too much, the bank cuts rates in order to get people buying again by making borrowing cheaper and more attractive than saving money under your mattress!
Final Thoughts
Whether you’re looking for a condo pre-construction or resale, it’s always best to work with a real estate agent that is experienced in this changing market. By working with an agent who has experience in both pre-construction and resale condos, you can rest assured that you’ll get all the information you need to make an informed decision about your next purchase in a market that is slowing down
For more information on condo developments in Surrey, contact the team at Ipresalecondos.
Ipresale Condos is not just an agency that sells real estate, but our agents believe in educating each client deal with their own professional situation. Please call or text at 604-825-8881 or email at info@ipresalecondos.com
