Bank of Canada Increases Rate 0.25% – What This Means For Mortgage Holders and Homebuyers
The Bank of Canada (BoC) has raised rates once more – today was the second consecutive rate hike this summer. The news was not shocking to most financial markets experts as bond rates have increased significantly since the last rate hike.
First Things First: The Bank of Canada Policy Rate Now Stands At 5.00%
Variable mortgages are impacted by the Bank Prime Rate, which will increase from 6.95% by 0.25% to 7.20%.
Making your borrowing more expensive.
An example of last month:
A $500,000 variable mortgage secured at nesto’s low rate of 5.75%, your monthly payment would be $3,146.
| Mortgage Amount | Mortgage Payment | Qualifying Mortgage Payment |
|---|---|---|
| $100,000 | $629.11 | $738.99 |
| $200,000 | $1,258.21 | $1,477.98 |
| $300,000 | $1,887.32 | $2,216.97 |
| $400,000 | $2,516.43 | $2,955.96 |
| $500,000 | $3,145.53 | $3,694.96 |
| $600,000 | $3,774.64 | $4,433.95 |
| $700,000 | $4,403.74 | $5,172.94 |
| $800,000 | $5,032.85 | $5,911.93 |
| $900,000 | $5,661.96 | $6,650.92 |
| $1,000,000 | $6,291.06 | $7,389.91 |
An example after the rate hike today:
Now, after the rate hike, your mortgage variable mortgage payment would increase to $3,222.
| Mortgage Amount | Mortgage Payment | Qualifying Mortgage Payment |
|---|---|---|
| $100,000 | $644.30 | $771.82 |
| $200,000 | $1,288.60 | $1,543.63 |
| $300,000 | $1,932.90 | $2,315.45 |
| $400,000 | $2,577.21 | $3,087.26 |
| $500,000 | $3,221.51 | $3,859.08 |
| $600,000 | $3,865.81 | $4,630.90 |
| $700,000 | $4,510.11 | $5,402.71 |
| $800,000 | $5,154.41 | $6,174.53 |
| $900,000 | $5,798.71 | $6,946.35 |
| $1,000,000 | $6,443.01 | $7,718.16 |
Are you a first-time buyer?
What Our Economist Francis Gosselin Is Saying on Why The Hike Happened
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How You Can Prepare Post-Bank of Canada Rate Hike
For individuals in the housing market, there are many options available. Early renewals remain a viable choice to lock in mortgage rates before expected rate hikes, while extending mortgage terms can act as a hedge against inflation, potentially reducing payments.
Prior to purchasing, renting may be wise whilst waiting for inflation to settle. However, timing the market for your purchase may be difficult as the Bank of Canada is expected to move rates down once inflation is under control, thus moving the needle up on home prices. It’s important to note that although the current home trajectory may show some toughs of low prices, it’s unlikely to continue.
Overall, the market is ever-changing and tracking economic indicators is key to optimizing mortgage decisions.
Early Renew Your Mortgage
For those who feel uncertain about market fluctuations, we recommend early renewal of your variable-rate mortgage into a fixed rate. This switch can stabilize your payment over the next 3 to 5 years and potentially reduce your monthly bill. Talk to your lender now to know your options for early renewal or refinance to a fixed rate.
Additionally, for first-time homebuyers, we recommend securing your mortgage and then renewing or extending/refinancing into a fixed rate immediately, if budgeting is an issue.
Extending Your Mortgage Term
For a home investment over the long term, early renewal might be beneficial. This will increase your mortgage term and prevent renewing during prolonged periods of uncertainty. Choose between fixed and variable rates depending on your preference and risk tolerance.
Consider prepayments on variable-rate mortgages, or opt for an adjustable-rate mortgage or a shorter fixed term to avoid hitting your trigger point amid the existing economic turbulence.
Renting While You Wait To Buy
Compare renting versus owning costs, where annual rent may cover mortgage payments, albeit renting doesn’t build equity. Inflation will increase home prices, so buy if your finances allow. By waiting on the sidelines, you risk missing out and could face an even more restrictive housing market.
Average rents in Canada increased by 13.03% on an annual basis, whereas average benchmark home prices nationally increased by 3.2%.
Home Prices Are Only Headed Up
Given the high demand and low housing supply, it is inevitable that housing prices will continue to rise in Canada over the long term. Even if the Feds walk back on immigration targets, Canada’s appeal for resettlement remains unchanged. Alongside our abundant natural resources and political stability, our overall need for immigration adds to the overall value that Canada offers.
Housing demand will only increase as supply continues to decrease. Global warming will also cause Canada to become a popular designation for climate and immigration refugees, contributing to further housing demand. This persistent demand will drive up housing costs and make them valuable commodities
Final Thoughts
This BoC prime rate hike brings Canada to a 25-year high, and impacts will be felt among renewers the most as their mortgages reach maturity over the next year. Although this may delay or dampen many homebuyers’ plans to get into homeownership, it will not change the available stock or supply of housing in this country.
If you’re getting ready for a mortgage renewal or a home purchase, the best way forward is to speak with a mortgage expert. With as little as 5 minutes to complete an application, you’ll be well on your way to your most suitable mortgage solution. Contact us today!
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