Jon Jilani, Bilingual Content Marketing and Communications Specialist
The Bank of Canada announced today that it will be increasing the key overnight rate by 50 basis points from 3.25% to 3.75%. This was a surprise to many, as some prominent experts had been predicting a potential larger increase of 75 basis points. Although the Bank was clear that further rate hikes will be needed to get inflation under control, it also indicated that it will be examining the economic effects of its current rate strategy.
WATCH: Analysis by mortgage expert, James Laird
Is the end in sight?
Although further Bank of Canada interest rate hikes remain certain, there are some indications that the Bank of Canada interest rate increases might be nearing their end. In the wake of today's announcement, the current value of bonds has dropped; lower bond yields mean that fixed mortgage rates should also drop as Canadian lenders adjust to the lower cost of funds.
If you have a variable-rate mortgage or a home equity line of credit (HELOC), you may feel relieved that today's rate hike was only 50 basis points versus the 75 basis points many had been expecting. You can also take some comfort in the Bank's language signalling that future rate hikes will be based on its assessment of how all of the rate hikes throughout 2022 have affected the economy.
What this means for you
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.
Fixed vs. variable
If you're currently choosing between a fixed or a variable-rate mortgage, the indications in today's announcement that rate hikes may soon come to an end could mean that a variable-rate mortgage is more appealing. In its announcement, the Bank predicted that inflation will come down to 3% by the end of 2023 - when inflation drops, the Bank could well reduce rates, making a variable-rate mortgage more affordable.
Stress test rates
If you are struggling to qualify for a mortgage due to today's high stress test, it's important to remember that stress test rates may be close to their peak if we are nearing the end of consecutive rate hikes.
The Bank's indication that it may be reaching the end of rate hikes should bolster home values across the country. If rates don't rise much further, you can expect to see home prices stabilize and possibly even appreciate if inflation gets under control.
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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 $640,000 home (average home price in Canada in September 2022 was $640,479 according to CREA) with a 5-year variable rate of 4.25% amortized over 25 years (total mortgage amount of: $593,856), you have a monthly mortgage payment of $3,205.
With today’s 50-basis point rate increase, your variable mortgage rate will increase to 4.75% and your monthly payment will increase to $3,370.
This means that you'll pay $165 more per month or $1,980 per year on your mortgage payments.
The bottom line
No matter what your mortgage situation is, if you want expert advice on how to navigate today's rising rate environment, feel free to contact one of our mortgage brokers. They can go through different mortgage scenarios and offer personalized advice at no cost to you.