The overnight rate determines the rate at which banks lend money to each other on a regular basis. In practice, changes in the overnight rate get passed on to consumers through corresponding changes in interest rates on different financial products.
Here's how the increase in interest rates could filter down through the kinds of loans held by Canadians:
1. MortgagesCanadians with variable-rate mortgages, also known as adjustable-rate mortgages, will immediately feel the increase in the overnight rate.
For homeowners who have locked in a fixed-rate mortgage, nothing will change until the fixed term ends and it's time to renew. Even before the Bank of Canada's move on Wednesday, some of Canada's big banks already started charging more for their five-year fixed-rate loans.
That said, it's possible that some fixed-rate mortgage holders who renew in the near future could actually lock in a new fixed-rate mortgage at a lower interest rate than they signed up for five years ago, according to Preet Banerjee, author of Stop Over-Thinking Your Money!.
Those borrowers "may actually still be renewing into a lower rate, because even though rates are going up, they're still lower than when a lot of people got their fixed-rate mortgage," Banerjee said.
2. Home equity lines of credit (HELOCs)Canadians who use their homes as a source of cash by borrowing against their home equity could quickly owe more now that interest rates have risen, as those loans are frequently variable rate.
Read more about the impact of interest rates on HELOCs:
- Mortgages won't be only problem for many Canadians
- Home equity lines of credit: What you need to know
Source: CBC News