Winners and losers from higher interest rates

TORONTO — Another month of solid growth for the Canadian economy in April and upbeat survey results from the Bank of Canada have strengthened expectations that the central bank will soon begin increasing interest rates for the first time in seven years.

Higher borrowing costs would have far-reaching implications for average Canadians, rate-sensitive industries and the broader economy. Below is a breakdown of some potential winners and losers.

The banks

With the Bank of Canada keeping its main policy rate near rock-bottom levels since the 2008 financial crisis, Canadian banks have found their net interest margins — the difference between the money they earn on the loans they make and what they pay out to savers — under pressure.

“As interest rates have continued to decline, they couldn’t lower their funding costs anymore,” says Barclays analyst John Aiken.

For example, the banks fund much of their lending via deposits, and they don’t want to reduce the interest rate on savings accounts to below zero, Aiken notes. Rising rates will alleviate some of that pressure on their net interest margins.

Life insurance companies

Another sector that’s poised to benefit from rising rates is the insurance industry. Life insurance companies have liabilities that are very long term in nature, but their investments tend to be for much shorter terms.

“Therefore, in a rising interest rate environment, you actually get more return on your assets as they reprice than what you had originally factored in when you wrote the contract,” says Aiken.

That being said, the major Canadian life insurance companies have a greater exposure to U.S. interest rates than to Canadian ones, Aiken notes.

Homeowners

Homeowners with outstanding mortgage debt are likely to see their monthly payments rise — but only by a little.

Rob McLister, the founder of RateSpy.com, says that if the big banks boost their prime rates by a quarter of a point, the typical variable-rate borrower will see their monthly payment go up by about $24. That’s based on an average mortgage of around $201,000, with an average rate of roughly 2.15 per cent, an average contracted amortization period of 22.4 years and a remaining amortization of somewhere between 14 to 19 years.

“One or two rate hikes alone won’t derail the housing train or economy. Nor will it cause a material uptick in defaults or real estate listings,” McLister says.

“Three or more hikes is a different story. Rates that are 75-100+ basis points higher would cause a perceptible drag on sales and add another load to peoples’ already heavy debt burden.”

Savers

Those with money stashed away in a savings account may not see much of the boost in the event of a rate hike. That’s because the banks are likely to increase the interest rates on loans, without providing a corresponding boost to the rates they pay on savings accounts, says Aiken.

However, the yields on many fixed-income instruments — such as GICs and money market funds — will likely increase. That’s good news for pensioners and others invested in fixed income assets.

Pension funds

Defined-benefit pension plans calculate how much money they need to be sure they can pay their promised benefits using long-term bond rates. The lower the interest rates, the more money companies need to put into their pension plans. A rise in long-term bond yields will reduce the amount defined-benefit pension plans need to hold today to pay future benefits and ease the burden on the companies that offer them to their workers.

Governments

Higher interest rates are bad for governments, which tend to be net borrowers and therefore will have to pay more to service their loans. More tax revenue being spent on debt interest payments means there is less available to spend on programs such as education and health care.

Just Posted

Canadians told to brace for a ‘classic’ Canadian winter with lots of snow

TORONTO — One of Canada’s high profile weather forecasters is warning Canadians… Continue reading

Nebraska set to vote today on fate of TransCanada’s Keystone XL pipeline

CALGARY — Five commissioners in Nebraska are set to vote today on… Continue reading

Hippie cult leader Charles Manson dead at 83

LOS ANGELES — Charles Manson, the hippie cult leader who became the… Continue reading

Tie new affordable housing money to outcomes, former watchdog tells Liberals

OTTAWA — Parliament’s first budget watchdog is warning the federal government to… Continue reading

WATCH: Christmas Wish Breakfast toy donations almost double

All toys donated Sunday will be given to the Red Deer Christmas Bureau and Red Deer Salvation Army

VIDEO: Replay Red Deer: Nov. 19

Watch news highlights from the week of Nov. 13

CP Holiday train to stop in Ponoka for another year

The popular train will feature entertainment from Colin James and Emma-Lee

Kittens rescued after allegedly being tossed from vehicle

Couple finds abandoned kittens new home through Facebook

VIDEO: ‘Party bus’ goes up in flames in Vancouver

Fire crews responded to the late night blaze

Chicken crosses B.C. road, stops traffic

Rooster makes early morning commuters wait in Maple Ridge

Red Deerian honours her brother who died in a motorcycle collision

Houaida Haddad is encouraging Red Deer residents to donate blood

Red Deer County firefighters to be recognized for Waterton help

RCMP brass will give formal recognition Monday

Ron James tries to lighten humanity’s load through humour

The comedian returns to Red Deer for shows Dec. 1 and 2

100+ Women Red Deer donate to Christmas Bureau

About $14,000 will help with Christmas hampers and toys

Most Read


Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month