The Bank of Canada announced Wednesday its benchmark interest rate will rise by a quarter percentage-point to 1.75 per cent.
The Bank of Canada prime rate is now 3.95%
Analysts widely predicted a rate hike due to belief that the economy is sturdy enough to handle such a rise.
Trade uncertainty with the United States is mostly resolved with the new U.S.-Mexico-Canada Agreement.
Employment rose by 63,000 in September, mostly in British Columbia and Ontario, driven by an increase in part-time employment. The unemployment rate declined 0.1 percentage points to 5.9 per cent.
Inflation fell to 2.2 per cent in September, easing downward from a high of 2.8 per cent in August largely due to softening gas prices and airfare prices. That’s still above the targeted 2 per cent, but Bank of Canada expects inflation to gradually to fall back to those levels early next year.
Some future concerns to watch for include lower retail sales, down 0.1 per cent, a recent slump in Canadian oil prices, at under $26 USD a barrel, and trade conflict between America and China weighing on the global economy.
The average Canadian will most strongly feel the effect of this rate hike in relation to their mortgages.
The rock-bottom interest rates of the last decade, ironically, provided a flourishing environment for soaring housing prices. As mortgages became cheap to own, Canadians increased their borrowing. But the low-rate environment was never going to last forever, and the central bank has now lifted rates five times since July 2017. The problem is that Canadians are in such deep debt, that any rise in interest rate could affect the whole economy — the more they have to pay toward their mortgage, the less they are able to be good consumers.
The Bank of Canada indicated that we could see continued rate hikes in the future, but it will take into account how the economy is adjusting to higher interest rates “given the elevated level of household debt.”
The debt to service ratio, which measures the proportion of household disposable income that is devoted to making interest and principal payments, has been a huge concern in the past few years and is now 14.15%, up from 13.9% from the first quarter of 2018.
But we are already seeing Canadians react — as rates have crept upwards and the federal-bank regulator tightened lending rules, borrowing has finally slowed — Canadians borrowed $3.6 billion less in mortgages this quarter compared to the previous quarter.
We’ll see if this slow-down continues into the next quarter.
The next scheduled date for a potential rate hike is a December 5, 2018.
What does this mean for a Canadian homeowner with a variable rate?
The following calculations were created using our mortgage affordabiity calculator.
According to the Canadian Real Estate Association, the average home price in Canada is around $487,000. A homeowner who put a 10% down payment on an average-priced home, amortized over 25 years, with a 5-year variable rate of 2.45% has a monthly mortgage payment of $2,013.
With today’s 25-basis point rate increase, their mortgage rate has increased to 2.70% and monthly mortgage payment has increased to $2,070. This represents an additional $57 per month or $684 per year in interest payments.
“Households who have a variable mortgage rate should consider locking into a fixed rate. Households who continue with a variable rate mortgage can expect their bank to increase the prime lending rate by 25 basis points. This means their November mortgage payment will go up.”
– James Laird, Co-founder of Ratehub Inc. and President of CanWise Financial