Interest Rates are a hot topic among financial news headlines, and there is good reason for this. Once the Bank of Canada changes their overnight rate, all other bank’s prime rates are affected. In addition, interest rates change continuously, and this fluctuation directly affects your personal finances.
Interest Rates in the Past
The last decrease in the Bank of Canada’s interest rate occurred at the beginning of 2015. At this time, the rate lowered from 1% to 0.75%. The decision was made in response to the economic threat posed by plummeting oil prices. Previous to the decision to lower the interest rate, the Bank of Canada maintained a rate of 1% since 2010.
In the July following the first rate decrease in 2015, the Bank of Canada’s interest rate was lowered even further to 0.5%. The rate of 0.5% was maintained until July 12th, 2017 where for the first time in seven years, the rate was raised once again. More Information on the 2017 rate hike can be found with the following link, “Mortgage Rates Are On The Rise.”
Since July 12th, 2017, The Bank of Canada’s has been steadily increasing their interest rate. As of February 15th, 2019, the current rate stands at 1.75%. And, as mentioned before, once there is a change in the overnight rate, all other prime rates are affected.
Interest Rates & Debt-to-Income Ratio
How can a change in the overnight rate affect your personal finances? The answer is the debt-to-income (DTI) ratio. The DTI ratio represents the average individual monthly debt payment to each dollar of personal income. Back in April 2017, the DTI ratio was 1.65, meaning the for every dollar of personal income, Canadians owed $1.65. As of January 2019, the national DTI ratio climbed to $1.78, but for Toronto, the DTI ratio sits at 2.08.
This is where the truth hurts. Every time the overnight rate rises, so does the interest rate on your monthly debt payment. With the DTI ratio on the rise and the Bank of Canada planning to increase the overnight rate again this year, you need to be prepared.
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