Another interest rate hike from the Bank of Canada means some Canadians could be spending a lot more on their monthly mortgage bills.
"The most immediate impact will be for variable rate mortgage holders," James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, told CTVNews.ca by phone Tuesday.
"It's all but certain that when the Bank of Canada makes this announcement, the various mortgage lenders in the country—banks, credit unions, trust companies—they will all change their prime lending rate by the same amount."
Analysts widely predicted interest rates would be raised Wednesday by three quarters of a percentage point to 3.25 per cent. Aimed at fighting inflation, the increase follows a full percentage point hike in July, which was the largest single rate increase in Canada since August 1998. The Bank of Canada began hiking interest rates in March, after they fell to 0.25 per cent during the COVID-19 pandemic.
For those with variable rate mortgages, a 3.25 per cent interest rate could mean spending thousands of dollars more per year.
According to Ratehub.ca's online mortgage calculator, if you purchased a $630,000 home with a 10 per cent down payment and a five-year variable rate of 3.5 per cent, payable over 25 years, your monthly mortgage bill would jump by $236 a month, from $2,919 to $3,155, meaning that you would be spending $2,832 more per year on mortgage payments.
If the Bank of Canada opts to only raise interest rates by half a percentage point to three per cent, the same homeowner would still be paying $156 more per month, or $1,872 more a year. The average home price in Canada in July 2022 was $629,971, according to the Canadian Real Estate Association. Obviously, those with more expensive homes should expect to pay much more.
"By the size of your mortgage, the more you're going to feel it," Laird said.
Those with a home equity line of credit will be similarly affected, Laird notes, and an interest rate hike will also make it harder to pass a "stress test" and qualify for a mortgage.
Variable rate mortgages have interest rates that fluctuate over time, compared with fixed rate mortgages where the interest rate is locked in from the beginning.
"Historically speaking, usually they're the cheaper way to go," Laird said of variable rate mortgages.
Whether that continues to be the case depends on how long inflation affects Canadians.
"If inflation persists, then the Bank of Canada will need to continue to raise rates, and in that scenario, the fixed rate will probably be the best choice," Laird explained.
Conversely, if inflation is brought under control, Canadians can expect interest rates to drop.
"And then further, if you think a recession might be coming in 2024, then the variable rate is going to outperform because when the economy slows down, the bank actually drops the interest rate," Laird said. "So, high inflation equals high rates, and a slowing economy equals lower rates."
With files from the Canadian Pres
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