Interest rate hike will be felt in pockets across N.L., says financial advisor
'This could push some people into bankruptcy,' says Larry Short
As the Bank of Canada raises its interest rate by the highest single-day increase in over two decades, a St. John's financial advisor fears it could mean bankruptcy to some in Newfoundland and Labrador.
Canada's central bank raised its benchmark interest rate Wednesday by a full percentage point, to 2.5 per cent — the biggest one-time increase in the bank's rate since 1998. The interest rate affects the rates Canadians get from lenders on mortgages and lines of credit.
Wednesday's change marks the rate's fourth upward shift since March.
Larry Short, senior financial advisor with Short Financial, said he wasn't surprised by the shift as interest rates are usually hiked to combat rising inflation.
"All raising an interest rate really does is tax or pull away, reduce your disposable income. So it means that the extra dollars you had at the end of the month, you don't have as much of it anymore," Short said Wednesday.
"It raises the cost of buying new products. So when an individual is looking at buying that $15,000 or $18,000 Ski-Doo next year, they're not going to necessarily step forward and do that.… It reduces demand in the economy, it reduces the growth of the economy itself."
Short said the increase will have a particular impact on those looking to get a mortgage on a home or renew their mortgage, adding it will likely have an impact on what people can afford.
"We see circumstances where people who could afford an $850,000 house are now down to $550,000, $600,000," he said.
"So depending on other factors, this has made a substantial change and dramatic impact on the housing market and what people can afford. Or in some cases, what they're going to renew."
Mortgage rates have skyrocketed since last May, according to Short, moving from around 1.84 per cent to over 4.75 per cent for a one-year mortgage rate. A five-year rate has ballooned to over five per cent, up from around 2.1 per cent last year.
That will likely translate to a downturn in the Canadian economy, he added, as housing prices and construction are a key factor of economic growth across the country.
Short says those who have money borrowed in a home equity line of credit will also be affected, as the variable interest rate has the potential to rise significantly.
"Depending on an individual's handling of variable rates … this could push some people into bankruptcy," he said.
Asked about any recommendations he may have for those looking at a mortgage, Short said it's best to consult with an advisor to see what works on an individual level. For example, potentially looking at a one- to three-year mortgage rate as opposed to locking in a five-year rate.
However, it's all about playing the waiting game to see where the rate goes from here.
'[To] bear with it in the short run is the only choice that we have," Short said. "We can't fight the increase in interest rate, but the key here is to shop around."
With files from Peter Cowan