The increase aims to stifle inflation, which is proving more tenacious than expected and is not coming down quickly enough towards the central bank’s objective, which is 2.0% on an annual basis.
However, the rise is also expected to weigh on those looking to buy a home or who hold mortgages.
What does the interest rate have to do with mortgage loans?
Mortgage rates tend to move with interest rates, so when one rises, the other is likely to follow.
A few hours after the Bank of Canada’s announcement, the banks began to increase their prime rates.
Canadians buying a home can choose between two types of mortgages: fixed rate or variable rate. Fixed rate mortgages allow borrowers to lock in the interest rate they will pay for a set period of time, while variable rate mortgages fluctuate with interest rates.
What does it mean if you have a variable rate mortgage?
Those with variable rate mortgages will see their interest rates rise to absorb the rate hike, said James Laird, co-CEO of rate comparison site Ratehub.ca.
For example, he estimates that a homeowner who had a 10% down payment on a $716,083 home with a five-year variable rate of 5.55% amortized over 25 years has a monthly mortgage payment of $4,075.
With today’s 25 basis point rate increase, this homeowner’s variable mortgage rate will increase to 5.80% and their monthly payment will increase to $4,173. This means the homeowner will pay an extra $98 per month or $1,176 per year on their mortgage payments, Mr Laird continued in a press release.
As for those with fixed payments on an adjustable rate mortgage, Laird predicts they will exceed their trigger rate if they haven’t already — the point where payments are no longer enough to cover all accrued interest since the last payment. This means that the entire mortgage payment covers the interest, and therefore nothing is allocated to the principal.
What about fixed rate mortgages?
“Fixed rates had already started to rise in anticipation of a possible rate hike and will rise further now that we know the bank has raised rates,” Laird warned.
This will impact anyone getting a fixed rate mortgage or renewing an existing one.
With the highest interest rate in more than 20 years, “fixed rates are also higher than the rate many people renewing are probably at right now,” said Olympia Baldrich, vice president of products. retail at TD Bank.
She recommends people whose mortgages are about to be renewed consider a rate hold, which locks in a mortgage rate for a certain period of time.
Borrowers with an adjustable rate mortgage, should they switch to a fixed rate mortgage?
Every mortgage holder’s situation is different, Baldrich said.
For those worried about mortgage payments, she urges people to review them with a mortgage specialist or financial adviser who can help determine whether to switch to another type of mortgage.
They can also help explore options for increasing payments, making lump sum payments, or slowing down payments.
“Go look at your finances, take a step back and just look at your big picture financial picture and what it would mean if rates continued,” she advised.
What does this mean for those looking to buy a home?
“The market sort of bottomed out at the start of the year and home sales and home prices really bottomed out then, but confidence has risen again (recently),” he said. observed Mrs. Baldrich.
National home sales jumped 11.3% between March and April as the housing market rebounded, but supply remained at a 20-year low, the Canadian Housing Association said. real estate last month.
Seasonally adjusted sales for April totaled 38,164, down from 34,277 in March, while the average home price was around $716,000 in April, down 3.9% from April 2022 but up $103,500 compared to January 2023.
Those entering the market now can expect higher rates than others have received in previous months or years, but it will be a few weeks before we begin to see the market ramifications. , said Ms. Baldrich.
Laird expects rising rates to put downward pressure on house prices.
TO SEE | See Mathieu Dion’s analysis of the key rate hike in the bulletin Noovo the wire 17.
2023-06-07 22:09:24
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