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Household Finances The year so far in interest rates: Savers 1, Borrowers 0

This year is already shaping up as the most eventful in a decade for interest-rate watchers.

The country is zeroing-in on Wednesday's Bank of Canada announcement as an indicator of what's ahead for rates. But a shift to higher borrowing costs and savings rates has already begun. Mortgage rates have edged higher in recent weeks and returns on guaranteed investment certificates have increased in a few cases. The question going forward is not whether rates will keep rising – it's how much more upside there is in 2018.

The interest rates that affect savers and borrowers are influenced in two interconnected ways. One is the Bank of Canada's overnight rate, which sets the trend for variable-rate mortgages, lines of credit and floating-rate loans. The other is the interest rate on bonds issued by the federal government to finance its operations. If you want to know where five-year fixed-rate mortgages are going (and five-year GICs, to some extent), keep an eye on the five-year Government of Canada bond yield.

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Interest rates in the bond market have been chugging higher in recent weeks, a result of an improving economic outlook in Canada and globally. Bond yields could rise further if the Bank of Canada cranks the overnight rate higher and hints at more increases to come because of a stronger economy. If that happens, prepare for a fresh round of mortgage-rate increases on top of what we've already seen.

Royal Bank of Canada was the trendsetter among big banks last week, increasing its discounted five-year fixed-rate mortgage to 3.54 per cent from 3.39 per cent late last week. "There's been an uptrend for the last three or four weeks," said Rob McLister, founder of the mortgage-rate comparison website RateSpy.com. "We've seen a number of lenders slowly inch higher."

Posted rates for five-year fixed mortgages have risen lately just above 5 per cent in some cases, the first time they've passed that threshold in four years. Posted rates used to mainly be a starting point for negotiating a rate discount. Today, home buyers must be able to pass an affordability "stress test" based on five-year posted rates, even if they will actually pay a much-lower discounted rate.

Rates for savers have not been as sensitive to rising rates as borrowing costs. So while mortgages rates have widely moved higher, there have been fewer changes in returns on GICs. Notably, the online bank Tangerine increased its five-year GIC rate to 2.6 per cent from 2.25 per cent last week. Another mover is Oaken Financial, which is part of mortgage lender Home Capital Group. Oaken announced last week that rates would rise by 0.15 to 0.25 of a percentage point for terms of one through five years.

Oaken was offering five-year rates as high as 3.25 per cent last summer to attract customers after allegations from the Ontario Securities Commission that management at its parent company failed to disclose an investigation into mortgage-broker fraud appropriately. The most recent increases at Oaken bring the five-year rate to 3.15 per cent.

Both GIC and savings-account rates could benefit if the Bank of Canada raises rates this week and if there's a corresponding increase in the bond market. Savings rates increased negligibly when the Bank of Canada's benchmark rate cumulatively rose 0.5 of a percentage point last summer. For example, Tangerine bumped its rate up to 1 per cent from 0.8 per cent.

For borrowers, cumulative rate increases are starting to become a factor. RateHub.ca says someone who took out a $400,000 mortgage in early July, 2017, with a five-year variable rate of 2.5 per cent has already experienced a $101-monthly increase in payments. A quarter-point increase by the Bank of Canada this week would add an additional $52 a month.

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A personal finance story to watch throughout the year is how households adjust to higher borrowing costs. Consumer spending has helped support the economy – but will that continue? Default rates on mortgages and other borrowers have been remarkably low – can that continue? Will households cut back on saving? Will they borrow more to sustain their spending?

A lot of borrowers have known nothing but stable or falling interest rates. For now, that's done. We are living in a rising-rate world in early 2018, borrowers and savers both.

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