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Canadian borrowers wait and wonder if rates will rise tomorrow: Don Pittis

Canadian borrowers wait and wonder if rates will rise tomorrow: Don Pittis
From CBC - September 5, 2017

For millions of Canadians, whether or not the Bank of Canada increases interest rates tomorrow is not merelya financial page headline. It's matter ofmoney out of their pockets.

July's single quarter-point rise, the first in seven years, was easy to set aside as a quirky exception.

But the notion of asecond increase within two months suddenly changes the game.

In the world of compound interest, especially for consumerswho have pushed borrowing to the limit, each quarter-point rise increases the pain exponentially.

Bigger payments

Not only would another quarter-pointincrease double the extra cash borrowers must scrape together to maketheir monthly payments, this time it is hard to ignore the writing on the wallthat we are watching a trend.

As we have reported, U.S. rate increases are ominous for Canadian borrowers. U.S. Fed chief Janet Yellen's repeated warningspassed on byCBC News were bound to have a long-term impact on the cost of borrowing in Canada.

But when the Bank of Canada moves, the effect is much quicker.

If you are one of the millions of Canadians who have a line of credit or a variable-rate mortgage where the interest rate is pegged to prime,the impact will be likely be immediate.

Those with fixed-term mortgages, or things like car loans where the rate is set by contract to cover the entireborrowing term,havea pad. They have time to think about where to find the money to pay higher ratesonce they renegotiate their mortgage or buy a new car.

And a rate rise will affect the price of houses. Just as higher interest ratespush down the price of existing bonds, higher mortgage rates shouldhave a similar effect on houses.

'No way to avoid the math'

"Every single rise, yes, that will mean house prices are going to drop," says realty consultant Ross Kay from Burlington, Ont. "It's simple math. There's no way to avoid the math."

However, he says the rules imposed by theOffice of the Superintendent of Financial Institutions inanticipation ofa series of rate rises like the one that could continue this week, havealready had a bigger overall impact on the housing market.

This springOSFIrequired most first-time buyers to pass a stress test, suddenly forcing them to qualify for rates twoper centhigher than those in the market. Kay says thatimpact on the cost of borrowing at the entry levelhas had consquences all the way through the market and may dwarfthe fallout of anotherquarter-point rise this week.

In theory, rising interest rates, whether they come now or later, will hit consumers at many levels. That's because the cost of borrowing will rise not just for consumers but for businesses, too.

However the slowing effect of rate risesis far from instant. Research has shownthe full effect of a ratehikeis not seen in the real economy for more than a year.

A risk or an opportunity?

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