Bank of Canada Raises Target Overnight Rate to 2.5%
The Bank of Canada announced today that it will be increasing the key overnight rate by 100 basis points, from 1.5% to 2.5%. This is the largest Bank of Canada interest rate hike since 1998! With such a large rate increase, the Bank of Canada is showing that it is ready to fight inflation aggressively. The Bank has made it clear that more rate hikes are still to come this year, until inflation finally moderates.
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.
If you're currently shopping for a home, be sure to check out the best mortgage rates in Canada and get a pre-approval to lock in today's fixed rates for up to 120 days.
Qualifying for a mortgage
Keep in mind that as rates rise, so does the stress test. If you're looking to buy a home, it's a good idea to try a few different stress test simulations to account for both this rate increase and further rate increases over the course of 2022. No matter whether you're looking to get a fixed or variable-rate mortgage, you will be stress tested at 2% higher than your contract rate. With variable rates still lower than fixed rates, you'll qualify for more if you choose a variable rate. The flexibility of a variable-rate mortgage means you can convert it into a fixed-rate mortgage at any time if you want to after closing.
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Changes to your mortgage payment
If you have a variable-rate mortgage or a home equity line of credit, 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 $711,000 home (average home price in Canada in April 2022 was $711,316, according to CREA) with a 5-year variable rate of 2.50% amortized over 25 years (total mortgage amount of: $659,737), you have a monthly mortgage payment of $2,955.
With today’s 100-basis point rate increase, your variable mortgage rate will increase to 3.50% and your monthly payment will increase to $3,294.
This means that you'll pay $339 more per month or $4,068 per year on your mortgage payments.
The bottom line
With today's historically large Bank of Canada interest rate increase and more rate hikes on the horizon, it's natural to feel a little uncertainty. 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 with you and offer personalized advice at no cost to you.
Also read:
Variable or Fixed Mortgage Rates
Mortgage Stress Test: Everything You Need to Know
Mortgages and Inflation: How Do They Affect Each Other?
How Does the Rising Stress Test Impact Mortgage Affordability?