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Bank of Canada Increases Rate by 0.25% – What This Means For Borrowers

Bank of Canada Increases Rate by 0.25% – What This Means For Borrowers
Written by
  • Samson Solomon
| Jun 7, 2023
Reviewed, Sep 21, 2023
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You read that headline correctly – the Bank of Canada is back to raising rates. The news was ablaze with shock (and likely most of Canada too). But we’re not here to dwell on that. We are here to help you gather your thoughts, take notes, and take action. Ready to learn what the Bank of Canada increase today (June 7th) means for you? Let’s go.

First things First: The Bank of Canada Policy Rate Now Stands At 4.75%

Variable mortgages are impacted by the Bank Prime Rate, which will increase from 6.70% by 0.25% to 6.95%.

This means that borrowing just got more expensive.  

An example of the last few months:

A $500,000 variable mortgage secured at nesto’s low rate of 5.50%, your monthly payment would be $3,195.00

Mortgage Amount Mortgage Payment Qualifying Mortgage Payment
$100,000 $639.00 $769.00
$200,000 $1,278.00 $1,538.00
$300,000 $1,917.00 $2,307.00
$400,000 $2,556.00 $3,076.00
$500,000 $3,195.00 $3,845.00
$600,000 $3,834.00 $4,614.00
$700,000 $4,473.00 $5,383.00
$800,000 $5,112.00 $6,152.00
$900,000 $5,751.00 $6,921.00
$1,000,000 $6,390.00 $7,690.00
Common mortgage amounts and corresponding mortgage payments on nesto’s low rate of 5.50% on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% (7.50%).

An example after the rate hike today:

Now, after the rate hike, if your mortgage variable mortgage payment would increase to $3,320.00  

Mortgage Amount Mortgage Payment Qualifying Mortgage Payment
$100,000 $664.00 $786.00
$200,000 $1,328.00 $1,572.00
$300,000 $1,992.00 $2,358.00
$400,000 $2,656.00 $3,144.00
$500,000 $3,320.00 $3,930.00
$600,000 $3,984.00 $4,716.00
$700,000 $4,648.00 $5,502.00
$800,000 $5,312.00 $6,288.00
$900,000 $5,976.00 $7,074.00
$1,000,000 $6,640.00 $7,860.00
Common mortgage amounts and corresponding mortgage payments on nesto’s updated low rate of 5.75% on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% (7.75%).

Are you a first-time buyer?

What Our Economist Francis Gosselin Is Saying on Why The Hike Happened

1) Economic activity & employment in Canada has remained strong despite the 8 successive increases in policy rate from March 2022 to January 2023:

  •  41k jobs added in April, with analyst forecasting an average at 20k
  • Job creation is actually increasing in pace from a low of 21k in February

2) YoY inflation has ticked up by a tenth of a percentage point, from 4.3% YoY in March to 4.4% YoY in April. This was the first acceleration in CPI since June 2022:

  • The most significant contributor to inflation is housing, caused by BoC’s policy. Average mortgage costs are up 28.5%
  • Food is stabilizing but remains high. Low productivity and high wages are significant factors and could be solved by more capital investment or stable wages (self-fulfilling not happening)
  • Surprisingly, Mr. Macklem & co hasn’t decided to wait out another inflation report to see the trend. 

3) Divergence between the Canadian and the American rates could hurt Canadians over the long run, and Mr. Macklem cannot rule this out as a factor:

  • The May 3rd decision to heighten the Federal Funds Rate to 5.25% created a 3/4 point gap with the Canadian policy rate
  • Over time, this depreciates Canadian fixed-income products relative to the US, resulting in a weaker CAD
  • Low energy prices (petroleum is inelastic) reduce the demand for CAD
  • Higher USD will cause Canadian imports to be more expensive, creating more inflation
  • Higher USD makes exports cheaper relatively, which stimulates the economy further as we try to cool it down

4) Rational and irrational expectations need to be kept in check:

  • Many commenters (present company included) forecasted lower rates by EOY
  • The « pause » may have given consumers the impression that « the worst was behind » and pushed consumption & borrowing faster, producing inflation
  • A quarter-point will not upend the Canadian economy but will signal that the ‘war on inflation’ is not over.

Find a better rate, and we’ll match it, beat it, or give you $500*.

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How You Can Prepare Post-Bank of Canada Rate Hike

Homebuyers and homeowners have several options available to them in the current economy. Early renewals are viable for those wanting to lock in a mortgage rate before anticipated rate hikes. Extending your mortgage term can help you hedge against inflation and could lower your payments. 

If you’re still deciding whether to buy a home, renting could be wise while you wait for inflation to settle down. While home prices may be low right now, it’s important to remember that they likely won’t stay that way for long. By staying informed on market trends and exploring all your options for refinancing or buying, you can make the best decision for your financial situation. 

Overall, it’s an ever-evolving landscape and keeping an eye on factors like GDP and inflation can help ensure you’re making the most of your mortgage.

Early Renew Your Mortgage

Consider early renewing your variable-rate mortgage to a fixed rate to stabilize your payment over the next 3 to 5 years and potentially reduce your monthly payment.  Talk to your lender about your early renewal or refinancing option to a fixed rate. As a first-time homebuyer, if qualification is an issue, close your mortgage and renew or refinance to a fixed rate immediately.

Extending Your Mortgage Term

For a long-term home investment, consider early renewing to increase your mortgage term to avoid renewing during a prolonged period of uncertainty. Choose between fixed and variable depending on your preference and risk. 

Consider making prepayments on your variable-rate mortgage. Alternatively, opt for an adjustable-rate mortgage or a shorter fixed rate to avoid hitting your trigger point during the current economic uncertainty.

Renting While You Wait To Buy

Compare renting versus owning costs, where annual rent of $36,000 (based on $3,000 average monthly rent in Canada in May) won’t 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.

Home Prices Are Only Headed Up

Rising prices in Canada’s housing market are inevitable due to high demand and low housing supply. Regardless of the Feds curbing its immigration targets, Canada remains an attractive place to resettle. Our natural resources, political stability, and climate all add to the overall value that Canada offers newcomers. 

The demand for housing will only grow while supply continues to wane. And as global warming worsens over the next few decades, Canada will become a popular destination for climate refugees in addition to immigrants, further adding to housing demand in this country. The continuing demand for housing will keep driving up its cost and labour, making them valuable commodities.


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Today’s Best Mortgage Rates as of September 29, 2023

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