rates
PRIME RATE IS AT AN ELEVATED STATE Those with variable rate loans have seen their interest costs increase ten times since last March—and the cumulative effects are adding up.
As we’re all now acutely aware, the Bank of Canada has raised interest rates to a level not seen in decades from a near-zero policy rate. We’ll explore later on what that means at a macro level for borrowers, but for now let’s look at how an individual with a variable rate loan equal to the prime rate has fared thus far. Prior to the first increase in March 2022, prime was at an all-time low in Canada at 2.45% and monthly interest on $100,000 at prime was just $204. Each quarter point hike represents an increase in interest of $21,
per $100,000 outstanding. The relative change in interest gets smaller over time, for example the first 25 basis-point hike equates to a 10% increase in interest per $100,000, whereas the most recent 25 basis-point hike equates to just a 4% increase. The issue of course for most variable-rate borrowers, however, is the cumulative increase. With each successive increase, more is required to service the debt, and with the prime rate now sitting at 7.20%, interest on each $100,000 borrowed is up to $600 per month, which is almost three times the original cost.
EVERYTHING COSTS MORE—ESPECIALLY MONEY
$90
30%
$80
25%
$70
$60
20%
$50
15%
$40
10%
$30
6.70% 6.95% 7.20%
6.45%
5.95%
5.45%
$20
4.70%
3.20% 3.70%
5%
2.70%
$10
$0
0%
Mar
Apr
Jun
Jul
Sep
Nov
Dec
Jan
Jun
Jul
CUMULATIVE INCREASE
$21
$63
$104
$188
$250
$292
$333
$354
$375
$396
ADDITIONAL MONTHLY CHARGE RIGHT AXIS
% CHANGE IN MONTHLY CHARGE LEFT AXIS
PRIME RATE
SOURCE: STATISTICS CANADA. TABLE 10-10-0122-01 & RENNIE INTELLIGENCE DATA: MONTHLY COST OF SERVICING $100K OF VARIABLE-RATE DEBT
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