The Bank of Canada has raised its interest rate to 4.5%, marking the eighth hike in less than a year. This announcement is likely to cause stress for prospective homeowners and mortgage holders, as mortgage rates tend to move in tandem with interest rate changes.
Leah Zlatkin, a mortgage broker with LowestRates.ca, said homeowners with variable-rate mortgages have witnessed substantial increases in rates from last year. Many have also experienced their amortization extend, as their payments have remained steady but they’ve paid down less principal.
The problem arises when these individuals hit their trigger point when monthly mortgage payments are no longer sufficient. At that point, the bank will adjust payments. For every $100,000 of a mortgage with a variable rate, homeowners can expect to pay $20 more per month, according to LowestRates.ca.
Canada’s Conventional Mortgage Lending Rate-2022
Assuming a 15% down payment under $1 million and a 25-year amortization period, the company completed several calculations. Based on the Canadian Real Estate Association’s average Canadian home sold for $626,318 last month, a variable rate of 5.25% will mean monthly mortgage payments of $3,261. At 5.5%, monthly mortgage payments become about $3,341, an increase of $80 per month.
In Toronto, where the average home sold for more than $1.1 million in December, a variable rate of 5.25% equates to monthly mortgage payments of $5,251. At 5.5%, monthly mortgage payments become roughly $5,378, an increase of $127 per month. In Vancouver, where the benchmark home price was $1,114,300 last month, a variable rate of 5.25% brings monthly mortgage payments to $5,312. At 5.5%, monthly mortgage payments reach about $5,441, an increase of $129 per month.
Zlatkin states that many people may experience shock when they renew their mortgage, as rates have increased substantially since they signed their current mortgage. “There’s going to be a situation where a lot of people may be experiencing shock when they renew their mortgage,” said Zlatkin.
The people, as Zlatkin says, will now likely have to qualify at a much higher rate than before. She advises those who foresee this situation to start budgeting now, and consider refinancing. This can mean amortizing the mortgage over a longer period of time, but not changing the amount paid. It’s important to discuss any potential changes with a broker sooner rather than later.
In a rising rate environment, many people often opt away from variable rate mortgages. However, Zlatkin believes making such a switch no longer makes sense for most people because rates have risen so sharply.
“In a rising rate environment, many people are often opting away from variable rate mortgages,” said Zlatkin.
When interest rates were around 2% last year, it was “super cheap” to break a variable rate mortgage. Now that rates have increased substantially, it will cost between 1 and 1.5% to break out of a variable rate mortgage. Zlatkin says “it might just be the wrong time” and “in 80% of cases, you’ve missed the boat.”
It’s important to note that while this interest rate hike may cause stress for some mortgage holders, it’s a sign of a strong economy. The Bank of Canada’s decision to raise the interest rate to 4.5% is a reflection of the country’s robust growth and rising inflation. This, in turn, means that the Canadian economy is strong enough to handle the increase in borrowing costs.
However, for those with variable rate mortgages, the hike may cause financial strain. As the interest rate increases, so do the payments on variable rate mortgages. This can lead to a situation where monthly mortgage payments become unaffordable. Homeowners with variable rate mortgages should be prepared for the possibility of their payments increasing as a result of this interest rate hike.
In addition, this interest rate hike may have an impact on the housing market. As borrowing costs increase, it may become more difficult for some individuals to afford a home. This could lead to a slowdown in the housing market and a decrease in home sales.