The Bank of Canada today announced that it will be increasing the key overnight rate by 50 basis points from 0.50% to 1%. The Bank noted that Canadian economic growth had exceeded expectations for the first quarter of 2022, and is optimistic that we will see continued and even further growth in the second quarter of the year. It expressed concern over inflation, which is being driven in part by the war in Ukraine and COVID-19 outbreaks in China that are causing supply chain disruptions.
What this means for you
One of the most significant takeaways from today's rate increase is that the stress test for all mortgages will increase. For each 1% increase in the stress test, the amount of mortgage that prospective homebuyers can afford will decrease by about 10%.
If you have a variable-rate mortgage or a home equity line of credit (HELOC), you'll be affected right away, as your lenders will increase their prime lending rates in line with the today's 50 basis point rate hike. You should also be preparing for further rate increases over the course of 2022.
If you currently have a fixed-rate mortgage, you won't be affected until your term ends, at which point you should be budgeting for higher rates when you renew. If you're currently shopping for a home, be sure to look at the best mortgage rates in Canada and make sure you get pre-approved in order to hold today's fixed rates for 120 days.
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Changes to your mortgage payment
If you have a variable-rate mortgage or a HELOC, you will be seeing an increase in your monthly payment. Here's a sample calculation:
According to Ratehub.ca's mortgage payment calculator, a homeowner who put a 10% down payment on an $800,000 home with a 5-year variable rate of 1.45% amortized over 25 years (total mortgage amount of: $742,320) has a monthly mortgage payment of $2,418.
With today’s 50-basis point rate increase, their variable mortgage rate will increase to 1.95% and their monthly payment will increase to $3,125.
Bank of Canada rate announcement: The bottom line
Regardless of your mortgage situation, if you're uncertain about what to do following today's Bank of Canada rate announcement, you can always contact one of our agents who can go through different mortgage scenarios with you to make sure that you’re ready for rising rates.