Is the Bank of Canada Interest Rate Hike Really of Concern?July 15, 2022
With a hike of 0.25%, the Bank of Canada has raised the interest rate last week to 0.5%. This has been the talk all over the country apart from the high gas prices. The rate of headline inflation has soared to a 30-year high to touch 5.1% recently, not only here in Canada but globally as well, in varying degrees.
As the fear of the pandemic recedes, we see a return in purchasing power in Canadian households backed by a stronger labour market, recovery in hospitality and travel sectors, an improved supply chain, and removal of Covid prevention restrictions.
With all these factors as a backdrop, the Bank of Canada’s decision to raise the interest rate was inevitable at the current time. Moreover, the decision to take a small step forward towards normalization of the interest rates was necessary to jump-start the economy again. This is just the beginning and Canada will see multiple rates hikes this year as the economy picks up and improves.
Many analysts at the top five banks see at least 4 interest rate increases in the works by the end of 2022. The rate hike on March 2nd, 2022, is the first the country has seen since 2018. And as such, it has ended Canada’s record-breaking low-interest period which had spurred on the housing market but did not put a brake on the home buyers’ demands.
What does the rate hike mean for homebuyers in an existing mortgage?
Let us examine with an actual example how the recent rate hike would affect a homebuyer, and then you can apply it to your situation:
Home Price: $800,000
Down payment 20% $160,000
Mortgage Amount $640,000
5-year variable rate* 1.55% (before rate hike) 1.80% (after rate hike)
Monthly Payment $2,573 (before rate hike) $2,648 (after rate hike)
5-year fixed rate* 3.25%
Monthly Payment $3,111
So, if your current monthly payment is $2,573, your monthly amount will go up by only $75 per month.
If you are on a fixed rate, the monthly payment does not change as fixed rates are not affected by overnight lending interest rate hikes.
So, what is the bottom line?
As one can see from the above example the rate hike effect is minimal on the monthly mortgage payment and not something to be overly concerned about. As you are qualified at 5.25% (banks stress test) for your mortgage, the rate hikes are minuscule in comparison. Of course, if you examine the variable over fixed rates then variable rates are still the better of the two in the current environment.