What to expect from the upcoming Bank of Canada interest rate announcement
Bank of Canada is set to announce its new interest in a week, and experts are predicting what could happen if another overnight interest rate hike is in the cards.
According to research from Ratehub.ca, the Bank of Canada is expected to increase the key overnight rate by 25 points to 50 points.
“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.”
The announcement anticipated on December 7 could be the seventh Bank of Canada interest rate hike of 2022. The last one came in October and the interest rate went up to 3.75%. The Bank attributed inflation to the decision.
Laird speculates that another rate hike means even more Canadians will “reach their trigger rate and trigger point.” This, he adds, only applies to those with a variable-rate mortgage with fixed payments.
Laird also noted that borrowers with this type of mortgage have not been forced to increase their payments to the full extent of the rate hikes this year, which means anyone with a variable-rate mortgage that has a variable payment has been forced to absorb the full impact of this year’s rate hikes.
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.
What happens if there’s a 25 basis point increase?
According to the Canadian Real Estate Association (CREA), the average home price in Canada in October 2022 was $644,000.
Keeping this in mind, Ratehub experts used their mortgage payment calculator to determine the following.
If the variable mortgage for a homeowner who put down a 10% down payment on a $644,000* home with a five-year variable rate of 4.75% amortized over 25 years (total mortgage amount of $597,568) will have an increased monthly mortgage payment of $3,391.
This means that the homeowner will pay $84 more per month, or $1,008 per year, on their mortgage payments.
What happens if there’s a 50 basis point increase?
If we see a 50 basis point increase, the aforementioned homeowner’s variable mortgage rate will increase to 5.25% and their monthly payment will increase to $3,561.
This means that the homeowner will pay $170 more per month, or $2,040 per year, on their mortgage payments.
The 2022 big picture
The year-to-date impact of Bank of Canada rate hikes looks rather dire.
In January, CREA calculated that the average home price in Canada was $784,850. If a homeowner paid 10% of its downpayment with a five-year variable rate of 0.90% (the best five year-rate available at the time), amortized over 25 years (total mortgage amount: $694,487), they would have a monthly mortgage payment of $2,585.
With a 25 basis point rate increase — a total increase of 375 basis points since January — this homeowner’s variable mortgage rate will increase to 4.65% and their monthly payment will increase to $3,902. That’s $15,804 per year on their mortgage payments — a jaw-dropping 51% increase.
A 50 basis point rate increase would bring this year’s total point increase to 400, and the homeowner’s variable mortgage rate will increase to 4.90%, with their monthly payment going up to $4,000.
That’s $1,415 extra per month, or $14,980 per year, on their mortgage payments.
How are you feeling about another potential interest rate increase? Is it time to give up on homeownership and just rent, or simply move to another country?
Let us know in the comments.
Follow Channels and Categories