'Still a borrower's world': What this week's rate hike means for your finances

After years of warnings that ultra-low interest rates can't last forever, the Bank of Canada finally raised its key overnight rate from 0.5 per cent to 0.75 per cent this week.

"Don't panic, but this should be a real kick in the butt," said personal finance expert Kerry Taylor in a CBC News Facebook Live.

The rate increase is relatively small, but it's enough to spark some hope that Canadians will start to do something about their record levels of debt.

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"Bite down, pay more principal off — you'll save more money over the long term," said Taylor, who answered questions from viewers earlier this week.

How will the recent interest rate hike benefit savers?

The interest rate hike may not be enough to actually incentivize savers. It's still below inflation, which means that over time, the buying power of savings deteriorates. 

So even with the rate increase, Taylor says, "It's a borrower's world."

That could start to change if interest rates go up further. But any increases will be gradual, so it could be months or even years before rates are high enough to be an incentive for savers.

How can I get motivated to save when rates are low?

To steer yourself away from borrowing and towards saving, Taylor suggests doing some serious math on your debt. Rather than look at how much your monthly payments cost, look at how much a mortgage, car loan or credit card will cost you over time.

"Sit down and look at all the different loans you have, all the different debt you're carrying, and look at the payments on the yearly basis," Taylor explained.

According to Taylor, when people see how much debt actually costs them in the long run, it should act as a wake-up call — especially as rates go up.

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And don't make just the minimum monthly payments. If possible, try to eat away at the principal, so interest will apply to an ever-shrinking balance owing.

Plus, having less principal to pay down "is going to protect you from rate hikes in the future," Taylor said.

How will a hike to the prime rate affect my fixed-rate mortgage?

Even mortgage-holders with fixed rates need to budget to pay more in the future as interest rates rise. Because while fixed-rate mortgages don't fluctuate with the prime rate, as variable-rate mortgages do, banks can raise the rates on all types of mortgages — something customers might find out when it comes time to renew. 

"You're going to be a little surprised, because your interest rate probably will be higher. So be prepared for that," Taylor said.

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Taylor recommends shopping around for mortgage rates at different banks and through mortgage brokers.

"Negotiate," Taylor said. "I think that's one thing Canadians fail to do often enough is negotiate."

How will higher rates affect real estate?

Higher interest rates can scare a large number of homebuyers out of the market, and a drop in the number of buyers could cause house prices to fall, particularly in hot markets like Toronto and Vancouver.

Prospective homebuyers should think twice about their homebuying budget as interest rates climb, Taylor says. "Are they going to be able to handle a rate hike tomorrow?" 

It's a question lenders will be asking, too. Taylor expects the enhanced mortgage stress test rules introduced late last year to have a big impact on buyers. Those rules require borrowers to prove they could handle a mortgage at the current rate as well as at a potentially higher rate in future. 

"I think that's great, " Taylor said, "because that protects Canadian consumers from making the biggest financial mistake of their life."