The big problem with the sharp rise in interest rates? The poor and indebted people are impoverished for the benefit of non-indebted households who have a lot of savings to invest.
According to central banks, such as the Bank of Canada or the US Federal Reserve, the best medicine to fight inflation is to tighten monetary policy.
In the face of stubborn inflation, the Bank of Canada monks, under Governor Tiff Macklem, saw fit to raise the policy rate from a low of 0.25% in February 2022 to its all-time high. in 22 years, or 5.0% this week. As a result, all banking institutions have been forced to follow in the footsteps of the Bank of Canada and have thus adjusted their rates during each of the 10 increases that have occurred in the space of the last 16 months.
Thus, rates on the entire range of loans have jumped by as much or almost, whether mortgages, personal loans, auto loans, business loans, commercial loans and other consumer loans.
As a result, households and businesses find themselves (or will find themselves) more indebted than ever, while everything is enormously more expensive due to inflation.
MORTGAGE VICTIMS
Among the hardest hit are all the households that bet on variable rate mortgages. In February 2022, just before the start of the Bank of Canada’s series of key rate increases, the range of variable interest rates was 1.47 to 1.87%, according to Statistics Canada. Today, the range of variable mortgage rates is 6.3 to 7.2%.
Per mortgage tranche of $100,000, amortized over 25 years, the household whose variable mortgage rate has increased from 1.85% to 6.60%, or 4.75 percentage points (like the key rate) of February 2022 to today, finds itself struggling with a 62.4% increase in monthly mortgage payments.
Per $100,000, the household will have seen its monthly payment of $416.25 in February 2022 now reach $675.90. On an annual basis, this goes from a disbursement of $4,995 to $8,110, an increase of $3,115 per $100,000 mortgage. In the case of a mortgage of $300,000, the supplement to be paid annually amounts to $9,345. For a mortgage of $400,000, it’s $12,460.
Households with fixed rate mortgages will also have their wallets scoured when they renew their respective mortgages.
Just 15 months ago, it was common to trade a fixed rate mortgage below 3%, even as low as 2.5%. Today, the one-year term plays 6.8 to 7.0%; that of 3 years from 5.90 to 6.54%; that of 5 years from 5.30 to 6.49%.
AN INFLATIONARY TIFF MACKLEM
Here is a very important fact to point out. Bank of Canada honcho Tiff Macklem suggests that the key rate could rise further if inflation continues to resist its horse medicine.
The problem? It should be noted that the main factor that contributed to the 12-month change (May 2022 to May 2023) in the Consumer Price Index was the cost of mortgage interest, which jumped by 29.9 %. Because of who? Eh yes! From Tiff Macklem and his policy of monetary tightening.
Moreover, as another main inflationary factor identified by Statistics Canada, there is maintenance and repairs carried out by the owner with a jump of 8.2% in the space of 12 months.
It goes without saying that these two factors alone are causing serious trouble for hundreds of thousands of homeowners and shattering the dreams of thousands of young couples who aspire to home ownership.
THE MOST AFFECTED
Households with well-stocked savings accounts are the big winners from the Bank of Canada’s monetary policy tightening.
Barely a year ago, guaranteed investment certificates brought in peanuts, like 1 to 2.5% as a return. Today you can get 5% for different terms. And even a little more among small banking institutions, such as Laurentian Bank and its subsidiaries B2B Bank and LBC Trust, which Quebec bank is for sale.
It is also a fortune for investors who bet on the purchase of municipal, provincial or federal bonds, which present little or no risk if they are kept until maturity.
2023-07-15 04:04:32
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