5 ms·

So what exactly does this entail?

betaby 9y ago
More expensive loans, higher interest rate on mortgages and credit cards. Traditionally saving accounts won't be affected and still have near zero return rate thought.
- Mister_Snuggles 9y ago
  Another thing to note is that variable rate mortgages will see their rates increase within a day or two. Mine hasn't gone up yet, but I expect it to increase tomorrow. This does not necessarily translate to higher payments, instead it just means the mortgage will take a little longer to pay off. To explain a little further: A variable rate mortgage can have fixed payments - every day your mortgage accrues a bit of interest, then when you make the payment it pays off that interest and the remainder pays off the principal. If the interest rate increases that just means that the interest that accrues every day is a bit higher and less of your payment goes against the principal, so it takes longer to pay it off. If the interest rate hits the point (the trigger rate) where your monthly payments no longer cover the interest, then your bank will call and want to increase your payments. In this case, a rate hike will translate to higher payments.
- cpncrunch 9y ago
  >saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit).
  - betaby 9y ago
    > I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit). They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.
    - cpncrunch 9y ago
      >They don't, that's why Reference? See my answer to RobertoG for more details.
      - betaby 9y ago
        That answer is incorrect. Bank can and will loan money they do not have http://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp http://www.investopedia.com/articles/investing/022416/why-ba... Neither there is a connection of saving account returns and discount rate. In contrast connection of the discount rate and CC rate is explicit http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardholder_Agreement_English.pdf http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardho... very first page.
        cpncrunch 9y ago
        Yes, I understand that banks don't need savings to generate loans and the two aren't tied, and my answer didn't say that. My point is that the market determines savings rates, and when interest rates are higher, banks can afford to give higher savings rates.
        makomk 9y ago
        It's true that bank loans create money rather than banks acting as middlemen who match up depositors with creditors, but savings and loans are still fundamentally tied together. The reason banks can create money through loans is because the loaned amount becomes a balancing deposit in one of their accounts, and even if it's used to pay people that use other banks that's fine so long as the outflow of loan-created deposits to other banks is balanced out by inflow of deposits created by loans. If they charge below-market interest rates and everyone starts moving their money elsewhere, this money printing trick breaks down and the magic money starts turning into actual debt. So even though banks aren't really lending out savings in the way people assume, they still need to keep their saving account returns competitive and somewhat related to money they're making on loans. The main difference between the incorrect model and how banks actually work has to do with the willingness of the banking industry as a whole to lend out money and the availability of credit - that genuinely is pretty much untethered from saving rates.
  - RobertoG 9y ago
    "the difference between the two gives the bank their profit" I don't think this is true. Banks don't lean the money from the deposits. About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit. They would avoid that so much as possible.
    - cpncrunch 9y ago
      >Banks don't lean the money from the deposits. Credit unions do, and banks have to compete with them. Also, CIBC's chief economist says "Recent history suggests an increase to the overnight rate will translate into a corresponding increase in interest earned from savings accounts", so I think I'll take the word of CIBC's chief economist over an anonymous HN user :) >About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit. Credit unions will increase rates, and if banks don't they'll lose profit. That's business 101, and it's why all gas stations have virtually the same price.

More expensive loans, higher interest rate on mortgages and credit cards. Traditionally saving accounts won't be affected and still have near zero return rate thought.

Mister_Snuggles 9y ago
Another thing to note is that variable rate mortgages will see their rates increase within a day or two. Mine hasn't gone up yet, but I expect it to increase tomorrow. This does not necessarily translate to higher payments, instead it just means the mortgage will take a little longer to pay off. To explain a little further: A variable rate mortgage can have fixed payments - every day your mortgage accrues a bit of interest, then when you make the payment it pays off that interest and the remainder pays off the principal. If the interest rate increases that just means that the interest that accrues every day is a bit higher and less of your payment goes against the principal, so it takes longer to pay it off. If the interest rate hits the point (the trigger rate) where your monthly payments no longer cover the interest, then your bank will call and want to increase your payments. In this case, a rate hike will translate to higher payments.
cpncrunch 9y ago
>saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit).
- betaby 9y ago
  > I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit). They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.
  - cpncrunch 9y ago
    >They don't, that's why Reference? See my answer to RobertoG for more details.
    - betaby 9y ago
      That answer is incorrect. Bank can and will loan money they do not have http://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp http://www.investopedia.com/articles/investing/022416/why-ba... Neither there is a connection of saving account returns and discount rate. In contrast connection of the discount rate and CC rate is explicit http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardholder_Agreement_English.pdf http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardho... very first page.
      - cpncrunch 9y ago
        Yes, I understand that banks don't need savings to generate loans and the two aren't tied, and my answer didn't say that. My point is that the market determines savings rates, and when interest rates are higher, banks can afford to give higher savings rates.
      - makomk 9y ago
        It's true that bank loans create money rather than banks acting as middlemen who match up depositors with creditors, but savings and loans are still fundamentally tied together. The reason banks can create money through loans is because the loaned amount becomes a balancing deposit in one of their accounts, and even if it's used to pay people that use other banks that's fine so long as the outflow of loan-created deposits to other banks is balanced out by inflow of deposits created by loans. If they charge below-market interest rates and everyone starts moving their money elsewhere, this money printing trick breaks down and the magic money starts turning into actual debt. So even though banks aren't really lending out savings in the way people assume, they still need to keep their saving account returns competitive and somewhat related to money they're making on loans. The main difference between the incorrect model and how banks actually work has to do with the willingness of the banking industry as a whole to lend out money and the availability of credit - that genuinely is pretty much untethered from saving rates.
- RobertoG 9y ago
  "the difference between the two gives the bank their profit" I don't think this is true. Banks don't lean the money from the deposits. About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit. They would avoid that so much as possible.
  - cpncrunch 9y ago
    >Banks don't lean the money from the deposits. Credit unions do, and banks have to compete with them. Also, CIBC's chief economist says "Recent history suggests an increase to the overnight rate will translate into a corresponding increase in interest earned from savings accounts", so I think I'll take the word of CIBC's chief economist over an anonymous HN user :) >About, why banks shouldn't increase saving accounts interest, the answer is, of course, profit. Credit unions will increase rates, and if banks don't they'll lose profit. That's business 101, and it's why all gas stations have virtually the same price.