Here’s how the BoC rate cut could affect Canadians' pocketbooks

The Canadian dollar coin, the Loonie, is displayed Friday, Jan. 30, 2015 in Montreal. (THE CANADIAN PRESS/Paul Chiasson)

Canadians may find it easier to cover debt payments now that the Bank of Canada has cut its key interest rate for the sixth straight time, according to financial experts.

“It will make money cheaper for anybody that is borrowing for anything -- for a house, for a car, taking money out of a line of credit,” Rubina Ahmed-Haq, a personal finance expert based in Toronto, said in an interview with CTVNews.ca. “All of that money is going to get cheaper to not just borrow but also for those who already have that debt, it’s going to be easier for them to service it.”

The country’s central bank slashed the key rate to three per cent Wednesday as it projected stronger GDP growth in 2025 if the United States doesn’t get into a trade war with Canada.

The move was notable, Ahmed-Haq said, but the situation may change if the United States imposes tariffs on Canada.

“I think it’s really significant because it does show that there’s confidence in the Canadian economy,” she said. “If tariffs do come in, it’s going to increase prices for Canadians. It could halt any further interest rate cuts.

“If inflation is higher, the last thing they want to do is cut rates and make money cheaper and stoke inflation even more,” she added.

Although the interest rate cut was expected, Paul Shelestowsky, an investment adviser, says he thinks “it’s going to provide quite a bit of relief” to borrowers or people looking to borrow.

“It will continue to bring down mortgage rates, loan rates, if you’re on a variable rate loan, even credit card rates ... it’s going to be felt across for pretty much all Canadians,” Shelestowsky said in an interview with CTVNews.ca on Wednesday about the central bank’s decision. “It will provide that relief to Canadians to help with their cash flow.”

Shelestowsky expects Canadians will have more discretionary income since debt repayment will be less costly, even though the central bank’s rate cut won’t help much with the price of goods and services, as inflation is expected to be stable.

Relief for borrowers

Canadians may see rates decrease for lines of credit immediately, Shelestowsky says, while it may take a while for credit card rates to follow suit. He adds that credit card companies will make changes based on a number of factors that aren’t necessarily tied to the Bank of Canada rates.

Those who invested in stocks and bonds may benefit from the central bank’s rate cut because those investments tend to do well in a falling interest rate environment, he said.

But it’s a different story for certain savers who put away money for non-risky investments like guaranteed investment certificates (GICs), as they will see their interest rates going down, which Shelestowsky cautions could mean less earning potential.

Shelestowsky doesn’t think the BoC rate cut will hurt those who have a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF) or a tax-free savings account (TFSA) and may even boost savings for those with well-balanced portfolios.

“Those tend to have a longer time horizon, meaning they’ve got a balance of stocks and bonds,” he said.

Would-be homeowners and current homeowners renewing their mortgages will also find relief, he added.

“I think it’s going to really make it easier for people to not only buy a house with a mortgage, but also renew their mortgage,” Shelestowsky said.

Advice for consumers

Ahmed-Haq’s advice for Canadians? Be wise about their personal finances and consider the unpredictable factors, such as possible U.S. tariffs on Canadian goods.

“In light of this, don’t use this as an excuse to get into more debt,” she said. “A lot of people might think, ‘Oh, money’s cheap again. Let me borrow for my summer vacation or do that renovation or something else that they they’ve been thinking about.’”

Ahmed-Haq adds that if you don’t need to do it, “this may be a good time to hold off.”

She also suggests that people can use home equity lines of credit (HELOC) to borrow money to consolidate debt and pay down their credit card debt, since they have lower interest rates, especially after the BoC rate cut.

Shelestowsky says having a financial plan and speaking to an adviser are important to maintain “financial health.”

“Because a lot of times when we see a bad year or a good year for whatever reason it might be, over the life of your plan, it really shouldn’t have that much impact,” he said.

With files from CTV News' Mike Le Couteur