Rate hikes shouldn’t hit ex­ist­ing loans

The Standard (St. Catharines) - - Opinion -


The big­gest con­cerns of the Bank of Canada are in­fla­tion and the high level of con­sumer debt.

An­other con­cern is the length of time it is tak­ing con­sumers to pay off their debts.

To com­bat in­fla­tion the favourite tool of the bank is to in­crease the prime lend­ing rate.

Lenders im­me­di­ately raise their rates not only to new loans but also to ex­ist­ing vari­able rate loans or mort­gages.

If the bor­row­ers are un­able to in­crease the rate of pay­ment they had bud­geted to pay in­ter­est plus an amount against the prin­ci­pal then the prin­ci­pal pay­back is re­duced, thereby in­creas­ing the length of time the loan is in ef­fect.

I have no prob­lem with lenders im­me­di­ately rais­ing their rate to cover the in­crease from the cen­tral bank, but it should not ap­ply to ex­ist­ing loans and mort­gages, only to new ones.

At the time the lenders granted the loans or mort­gages, they had monies in the sys­tem to sup­port them, so any in­crease in their prime rate does not in­crease the cost of car­ry­ing the loans and ac­tu­ally in­creases their prof­itabil­ity.

A ma­jor mort­gage lender in the U.S. ad­ver­tises that if you take a mort­gage with them and the prime rate goes up, your rate does not in­crease. Fur­ther­more, if the prime rate goes down, so does yours.

I am not sug­gest­ing Cana­dian banks should re­duce the rate on ex­ist­ing loans or mort­gages when there is a re­duc­tion in the prime rate. Let them re­al­ize the ad­di­tional profit this would pro­duce.

Jim McDow­ell


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