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Saturday, August 13, 2022

Mortgage-holders in Canada should prepare for a significant rate hike

Mortgage holders in Canada should brace for a major rise in Bank of Canada interest rates

Key Takeaways:

  • According to Bay Street experts, the rate will rise by 50 basis points, putting Canadians with variable-rate mortgages on edge and deterring some would-be homebuyers.
  • According to Zlatkin, homeowners who want to extend their five-year fixed-rate mortgage would have to dig further into their pockets.
  • Andrew Kelvin, TD’s Canada senior strategist, predicts the central bank will hike the overnight rate to 2.50 percent by the end of the year.

The Bank of Canada is predicted to declare its next interest rate move on Wednesday. Bay Street analysts predict a 50 basis-point hike, putting Canadians with variable-rate mortgages on the edge and deterring some would-be homeowners.

With variable-rate mortgages tied to the Bank of Canada’s decision, “interest rate hikes will start biting soon,” according to Robert Kavcic, the senior economist at BMO Capital Markets.

After the Bank of Canada hiked its overnight rate from 0.25 percent to 0.50 percent in March, the major banks, Canada’s main mortgage lenders, upped their prime rate from 2.45 percent to 2.70 percent.

This sets the situation for debtors to face even more pressure on Wednesday.

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According to Leah Zlatkin, a mortgage expert with LowestRates.ca, a homeowner with a variable rate mortgage would have seen their monthly mortgage payment go from 1.45 percent to 1.70 percent based on that 2.70 percent prime rate and a one percent discount — lenders typically offer discounts ranging from 0.60 percent to one percent.

“It’s an increase of around $85 per month on a home priced at $800,000 with a 15% down payment amortized over 25 years with that variable rate in place,” she said. A half-point rise would bring the total to about $170 per month.

Zlatkin predicts that homeowners ready to renew their five-year fixed-rate mortgage will be digging deeper into their pockets soon. As short-term bond yields rise, fixed rates, tied to bonds rather than central bank rates, have risen.

In a rising interest rate environment, Canadians who have spent the past saving money for a down payment on a home may find that their money does not stretch as far, she says.

Although the Bank of Canada’s primary purpose is to keep inflation under control, higher interest rates might have a cooling effect on Canada’s hot housing market, which BMO’s Kavcic says he’s already seeing.

In May 2000, when the nominal neutral rate, which allows full productivity while keeping inflation under control, was around 5%, the central bank hiked the overnight rate by half a percentage point in one sitting. The Bank of Canada believes that the nominal neutral rate is between 1.75 and 2.75 percent.

Mortgage holders in Canada should brace for a major rise in Bank of Canada interest rates
Mortgage holders in Canada should brace for a major rise in Bank of Canada interest rates. Image from The Globe and Mail

In a note, Desjardins’ head of macro strategy, Royce Mendes, stated, “A 50 (basis point) boost will do a lot more to slow the economy today than it did back then.”

Mendes also predicts that the Bank of Canada’s monetary policy tightening will stall after April and that “future rate hikes will come in moderate steps.”

“At the end of the year, the overnight rate would be 2.00 percent,” he stated.

Meanwhile, Andrew Kelvin, TD’s Canada senior strategist, believes the central bank will raise the overnight rate to 2.50 percent by the end of the year.

The federal Liberals announced $60 billion in new spending in their 2022 budget on Thursday, including measures to increase affordability and lower living costs.

Some economists believe that the increased government stimulus contributes to the country’s persistent inflation problems, which the Bank of Canada is aggressively attempting to address. On the other hand, other economists do not believe the budget’s spending and new initiatives will have a significant impact on the central bank’s route.

Source: CTV News

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