In the ever-changing landscape of mortgage rates, the Bank of Canada plays a significant role. Understanding how the Bank of Canada’s decisions can affect mortgage payments is essential for both potential and existing homeowners, as rising rates impact monthly payments and overall borrowing costs. In this article, we will explore how the Bank of Canada’s actions influence mortgage rates and provide insights to help you navigate the mortgage financing process in a high interest environment.

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Key Highlights

• The Bank of Canada’s Policy Rate has a direct impact on mortgage rates and has the power to influence monthly mortgage payments, as well as the borrowing power of new home buyers.
• Variable rate mortgage holders are directly affected by the Bank of Canada rate hikes. 
• Fixed rate mortgage holders are not immediately affected by Bank of Canada rate hikes, but might be subject to payment shocks at renewal time. 

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How do Bank of Canada interest rates affect mortgage payments?

When the Bank of Canada increases its interest rates, it has a direct impact on mortgage payments for the mortgage holder. As the central bank in Canada, the Bank of Canada sets the target overnight interest rate, which affects the borrowing costs for financial institutions. This, in turn, trickles down to the mortgage rates offered to consumers. 

Why you should care about increasing mortgage rates 

Whether you are a mortgage holder or a new homebuyer, increasing mortgage rates will affect you. For starters, if you are a potential new buyer, increasing rates will influence your borrowing power. Considering your income remains relatively stable, increasing rates can limit the size of the mortgage you qualify for.

Bank of Canada rate increases can have a significant impact on mortgage holders as well. Rate increases mean higher monthly mortgage payments, which can put a strain on household budgets and make it more challenging for some individuals to meet their financial obligations. It is essential for mortgage holders to carefully consider the potential impact of interest rate hikes and plan accordingly. 

How increased interest rates affect mortgage payments

When the Bank of Canada raises its interest rates, it typically leads to higher mortgage rates for borrowers. This means that mortgage holders will have to pay more in interest on their loans, resulting in an increase in their monthly mortgage payments. 

For individuals with variable rate mortgages, their interest rates are directly tied to the Bank of Canada’s policy rate. Therefore, any increase in the policy rate will immediately affect their mortgage payments.

For those with fixed-rate mortgages, the impact of Bank of Canada rate increases may not be felt immediately. However, when it comes time to renew their mortgage term, they will likely face higher interest rates and potentially higher monthly payments. This is because fixed-rate mortgages are typically tied to government bond yields, which are influenced by the central bank’s actions.

What Is the Current Bank of Canada Policy Rate? 

The current Bank of Canada Policy Rate is 5%. 

The prime rate for major Canadian banks and financial institutions is currently .

How Have Bank of Canada’s 2023 Interest Rate Hikes Affected Your Mortgage Payment?

Multiple rate hikes over time can have a significant impact on your mortgage.

To illustrate this point, the nesto team did a pull to see what the impact of the last ten rate hikes has been on a $500,000 home with a 20% down payment, on a 5-year fixed rate and a 25-year amortization. 

The results? Well, they were telling. 

Using the qualifying rate of 5.25% in March 2022, mortgage payments were split with $634 going towards principal and $1,750 going towards interest for a total monthly payment of $2,384. The income to secure this mortgage was as low as $95,000. 

Fast forward to August 2023 and using a qualifying rate of 7.24%. On a mortgage payment of $2,861, only $448 is going towards the principal, while the remaining $2,413 goes to interest. You’d also need to make $108,000 to secure this loan. 

What Is the Bank of Canada’s Interest Rate Announcement Schedule For 2024?

Bank of Canada rate announcements don’t happen randomly instead, they follow a set schedule for the entire year. Here is the Bank of Canada interest rate announcement schedule.

Announcement Dates 2023

• Wednesday, January 25* (press release)
• Wednesday, March 8 (press release)
• Wednesday, April 12* (press release)
• Wednesday, June 7 (press release)
• Wednesday, July 12* (press release)
• Wednesday, September 6 (next BoC announcement)
• Wednesday, October 25*
• Wednesday, December 6

Announcement Dates 2024

• Wednesday, January 24*
• Wednesday, March 6
• Wednesday, April 10*
• Wednesday, June 5
• Wednesday, July 24*
• Wednesday, September 4
• Wednesday, October 23*
• Wednesday, December 11

What Would Another Bank of Canada Rate Hike In 2023 Would Mean For Your Mortgage?

Another Bank of Canada rate hike can put a serious strain on variable-rate mortgage holders, who might be at risk of hitting their trigger points. Rate hikes also result in higher monthly payments, which can put a serious strain on household finances. Fixed-rate mortgage holders might be faced with payment shocks at renewal time, as their new mortgage rates might be significantly higher than their previous one. 

In an attempt to mitigate these higher monthly payments, many Canadian mortgage holders have stretched their amortization periods.

FAQ

Final Thoughts

Whether you are a potential new homebuyer or a mortgage holder, understanding how the Bank of Canada’s Policy Rate works and how it can impact your current or future mortgage payments can only help  you plan ahead. Are you up for renewal or looking to enter the market? Contact our team of mortgage experts to learn more about navigating today’s high interest rate environment. 

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