Rate hikes shouldn’t hit existing loans
RE: GET USED TO RISING INTEREST RATES, NOV. 6
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.