Review Your Variable Rate Loans in light of Higher Interest Rates



John Hale

Financial Advisor and Associate Portfolio Manager


On March 2nd, 2022, the Bank of Canada increased its overnight interest rate by 0.25% to 0.50%, in what is widely expected to be the first of a series of small rate hikes this year to cool the economy and tame inflation.   

The overnight rate, also know as the Bank of Canada’s key lending rate, is the interest rate major Canadian banks pay to borrow money for very short periods of time.  The overnight rate is also used by banks to determine their prime rate; the interest rate banks’ offer to its best customers.   As the overnight rate increases, so do prime rates.

Variable interest rates loans are also tied to a banks’ prime rate.   For example, when a bank offers at loan at “prime plus two per cent” they are quoting a variable rate loan product.   As the prime rate increases, the variable interest rate increases as well.  

As you can see, a rate increase by the Bank of Canada has a domino effect.  This is the key tool the Bank of Canada uses to adjust financial conditions and how their actions feed through to the real economy.

If your debts have a fixed interest rate, the Bank of Canada’s rate increases won’t affect you in the short term. However, if you have variable-rate debts, such as those listed below, you can expect your interest costs to rise, perhaps several times this year. Lenders can change a variable interest rate at any time. For borrowers, this means their rate is likely to fluctuate over the life of their loan. If your bank raises rates, your repayments will also rise.

  • Mortgages. When the Bank of Canada raises rates, the major Canadian banks almost immediately increase the rate on their variable-rate mortgages.  The interest rate on fixed rate mortgages will also increase however, this will only affect new fixed rate mortgages and not those already outstanding until renewal.  
  • HELOCs. Home equity lines of credit are typically variable rate loans of the “prime plus” variety and thus, will increase this year.
  • Credit cards. Most credit cards in Canada have fixed interest rates; however, some “low interest rate” cards do carry variable rates.   
  • Car loans. Most car dealers in Canada offer fixed rate loans however, some specialty lenders and banks over variable rate car loans as well.
  • Personal loans. Similar to mortgages, personal loans can have either fixed or variable interest rates.
  • Student loans. Student loan interest typically has a variable rate component as the federal portion of Canada Student Loans is based on the prime rate.  This won’t have an immediate impact because, as of April 2021, the interest payable on Canada Student Loans has been frozen until March 31, 2023. 

Pay off high-interest rate debts first

  • If you are trying to reduce your debt, focus on the highest interest rate loans first. If you’re only able to pay down one of your balances, you’ll save the most money by targeting the one with the highest interest rate first.
  • Next, focus on debts with variable interest rates, as those are currently at risk of higher interest costs.  In some cases, paying off all your variable rate debts may not make sense due to early repayment fees.  You should read your loan agreements carefully, so you understand your early payment options.  In the case of mortgages, early repayment fees can cost thousands of dollars.

We don’t know how much interest rates will increase this year, but targeting your variable rate debts for repayment now will help you maintain financially flexibility and remain financially solvent.

The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.

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