The Bank of Canada announced today that it will be increasing the key overnight rate by 75 basis points, from 2.5% to 3.25%. The Bank continues to be very concerned about inflation, and forecasted that rates would need to rise further to get inflation to the Bank's target of 2%.
What this means for you
Given the Bank of Canada's statement, you should expect further rate hikes in 2022 and 2023.
If you have a variable-rate mortgage or a home equity line of credit (HELOC), you'll see your rate rise accordingly. You should calculate what your new payment will be with the higher rate, and budget for more rate hikes this year. You can simulate different mortgage situations using our mortgage payment calculator.
If you have a fixed-rate mortgage, you won't be affected by this announcement until your mortgage is up for renewal. If your renewal date is coming up soon, you should start calculating what your payments will be based on today's higher rates.
This latest rate hike has created an unusual situation where variable rates and fixed rates are almost identical at the moment. If you're currently shopping for a home, be sure to check out the best mortgage rates in Canada.
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Changes to your mortgage payment
If you have a variable-rate mortgage or a home equity line of credit (HELOC), you'll see an almost immediate increase to your monthly mortgage payment. Here's a sample calculation:
According to Ratehub.ca's mortgage payment calculator, if you put a 10% down payment on a $630,000 home (average home price in Canada in July 2022 was $629,971, according to CREA) with a 5-year variable rate of 3.50% amortized over 25 years (total mortgage amount of: $584,577), you have a monthly mortgage payment of $2,919.
With today’s 75-basis point rate increase, your variable mortgage rate will increase to 4.25% and your monthly payment will increase to $3,155.
This means that you'll pay $236 more per month or $2,832 per year on your mortgage payments.
The bottom line
With it all but assured that there will be another Bank of Canada interest rate hike to come in the near future, no matter what kind of mortgage you have, you need to be prepared for higher rates. The Bank of Canada interest rate will keep on climbing until the central bank feels that it has gotten runaway inflation under control.