Recent Interest Rate Hike Implications
Thursday Mar 24th, 2022
In an attempt to cool the real-estate market and reduce inflation, the Bank of Canada has increased the overnight interest rate by 0.25%. An increase in the cost of borrowing is certain to have an impact on the number of homeowners and homebuyers.
According to economists, Canadians could see as many as four interest rate hikes this year, each comprising an additional 25 basis points. By the second half of 2023, the interest rate is expected to reach 1.75 per cent. Those with fixed-rate mortgages are unlikely to feel the effects of an interest rate hike soon after it’s implemented. Homeowners who are especially sensitive to interest rate hikes include those with variable-rate mortgages and home equity lines of credit.
When the Bank of Canada’s overnight rate changes, chartered banks will adjust their prime rates, which then impact variable rates.
Using an example of a five-year variable mortgage with a rate of 1.25 per cent, a down payment of 10 per cent and an amortization period of 25 years on a home that costs $748,500, the mortgage payment amounts to $2,696. After an increase of just 0.25 per cent in the mortgage rate, the total payment rises to $2,776, a difference of $80. This amounts to an increase of $960 per year, according to data from RateHub.ca.