The Bank of Canada has announced another interest rate hike — this time, it’s an increase of 50 basis points, to 4.25%.
The highly anticipated (and feared) update dropped Wednesday morning, and marks the seventh and final rate hike of 2022. The previous one came in October and the interest rate went up to 3.75%. The Bank attributed inflation to the decision then, and has said the same thing now.
“Inflation is still too high and short-term inflation expectations remain elevated,” reads a statement from the Bank. “The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”
Last week, Ratehub.ca predicted that the Bank of Canada would be increasing the key overnight rate.
“The impact will be felt first by Canadians with variable-rate mortgages that do not have fixed payments and those who carry a balance on a home equity line of credit (HELOC),” said Ratehub.ca CEO James Laird in a statement. “This group will have their payments adjust immediately to reflect the full impact of the rate hike.”
Laird said a 50-point increase could look like the following:
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $644,000 home (the average price of a home in October, according to CREA), with a five-year variable rate of 5.25% amortized over 25 years (total mortgage amount of: $597,568) has a monthly mortgage payment of $3,561.
This means that the homeowner will pay $170 more per month or $2,040 per year on their mortgage payments.
Laird calculates that those with a new mortgage will have to choose from three main options:
A five-year fixed rate
This is the right choice for anyone who thinks inflation will be persistent or anyone with tight household finances that cannot afford higher rates.
A five-year variable rate
This is the right choice for anyone who anticipates that the Bank of Canada is near the end of their rate hikes, and that they may even lower rates towards the end of 2023 and into 2024 as a result of a recession.
A short-term fixed rate
This is a similar strategy to taking a variable rate because it creates a quicker renewal, which will be beneficial to the borrower if rates decrease in the short term.