The Bank of Canada has reduced its interest rate to 4.75%, according to an announcement made by Bank Governor Tiff Macklem on June 5. Macklem emphasized that significant progress has been made in tackling inflation, reducing the necessity for a restrictive monetary policy.
This rate cut has considerable implications for Canadians, particularly those with variable rate mortgages, debts, and savings. Tyler Thielmann, President and CEO of Spring Financial, highlighted that individuals with variable rate debt would benefit the most from this change, as their interest costs will decrease, providing them with more disposable income each month.
However, identifying those who might lose out due to the rate reduction is more complicated. Thielmann pointed out that while the intention behind lowering interest rates is to stimulate economic growth, if the economy is already struggling, it could adversely affect many Canadians. He also suggested that the Bank of Canada's move might be aimed at preventing economic instability due to impending mortgage renewals.
For homeowners, particularly those with variable rate mortgages, the rate cut should translate to lower interest rates almost immediately, as banks generally adopt these cuts. Similarly, lines of credit used for home renovations, which are usually variable, will also see a reduction in interest rates.
Despite the positive impact for some, Thielmann noted that the benefits might not be as significant for others. For instance, individuals who secured mortgages five years ago when interest rates were under 2% may find the current rate still significantly higher, leading to higher payments upon renewal. Similarly, those who took out loans in 2020 after the pandemic may face substantial increases in interest costs if rates remain unchanged next year.
David Gray, an economics professor at the University of Ottawa, added that unanticipated inflation generally benefits borrowers while harming savers. However, once inflation is accounted for in nominal interest rates, borrowers could start to lose out.
Gray advises those burdened by debt to consider refinancing their variable-rate debt if feasible. Additionally, he suggests focusing on reducing consumption and investing in high-interest savings accounts (HISAs) or guaranteed investment certificates (GICs). For instance, online bank Tangerine offers GICs with terms ranging from 90 days to five years, with interest rates between 3.50% and 5.20%. Other banks like EQ Bank and Simplii Financial also offer competitive HISA options.
For those seeking a hybrid banking solution, KOHO provides a fintech option that combines higher interest rates with low fees. Through a downloadable app, KOHO offers a blend of banking and credit card perks, allowing users to manage their money efficiently while earning interest.
Thielmann advises against rushing to buy a house solely because of the interest rate drop, as the decrease is relatively minor. He recommends purchasing a home only if it is affordable under current interest rates and leaving room for potential future rate increases.
First-time homebuyers might find it challenging to save for their purchase. Thielmann suggests using tax-free savings accounts (TFSAs) as they offer tax-sheltered interest and investment earnings. EQ Bank recently introduced TFSA Savings Accounts with a 3.00% interest rate, appealing to those who want tax-free interest with liquidity.
Managing finances effectively is crucial in the current economic climate. Thielmann encourages individuals to have honest conversations about their income and lifestyle expectations, suggesting that significant changes might be necessary to achieve financial goals. This could involve increasing income or altering living conditions.
