With a hike of 0.25%, the Bank of Canada raised the interest rate last week to 0.5%. Apart from the high gas prices, this has been the talk all over the country; The headline inflation rate has soared to a 30-year high to touch 5.1% recently, not only here in Canada but globally, to 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 towards normalizing the interest rates was necessary to jump-start the economy again. This is just the beginning, and Canada will see multiple rate hikes this year as the economy picks up and improves.
Many analysts at the top five banks see at least four interest rate increases by the end of 2022. The rate hike on March 2nd, 2022, is the country’s first 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 with 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 of $3,111
So, if your current monthly Payment is $2,573, your monthly amount will increase by only $75.
If you are on a fixed rate, the monthly Payment does not change, as fixed rates are unaffected 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. The rate hikes are minuscule as you are qualified at 5.25% (bank’s stress test) for your mortgage. Of course, if you examine the variable over fixed rates, then variable rates are still better in the current environment.