What the Bank of Canada’s Rate Hike Means for Mortgage Holders

Canadians, who have watched the cost of a mortgage rising steadily over the past year, took another hit when the Bank of Canada hiked its interest rate to 4.5 percent on late last month.
The hike is the eighth in less than a year and was accompanied by the central bank, which said the rate is likely to remain at 4.5 percent unless Canada’s stubbornly high inflation rate falls short of its 2 percent target.
The rise in interest rates is bound to weigh on prospective homeowners and mortgage holders as mortgage rates tend to move in tandem with changes in interest rates.
Here’s a look at what this announcement will mean for the mortgage sector.

What does this announcement mean for people with mortgages?

A rate hike like this will usually bring a lot of stress, said Leah Zlatkin, a mortgage broker at LowestRates.ca.
Homeowners with adjustable-rate mortgages that fluctuate have seen their interest rates rise significantly compared to last year.
Many have already seen their payback lengthen as interest rates have risen because they have paid back less principal while their payments have remained constant.
It becomes dangerous when these people reach their trigger point – when the monthly mortgage payments are no longer sufficient. At that point, your bank will call and adjust your payments, she said.

How much can the average adjustable-rate mortgage holder expect their mortgage to increase as a result of these changes?

For every $100,000 of an adjustable rate mortgage, homeowners should expect to pay $20 more per month, LowestRates.ca said.
The company ran several calculations, assuming someone had a 15 percent down payment under $1 million and a payback period of 25 years.
Based on the Canadian Real Estate Association stating that the average Canadian home sold for $626,318 last month, a 5.25 percent floating rate means monthly mortgage payments will be $3,261. At 5.5 percent, monthly mortgage payments are about $3,341, an increase of $80 per month.

In Toronto, where the Toronto Regional Real Estate Board found that the average home sold for more than $1.1 million in December, a 5.25 percent floating rate equates to monthly mortgage payments of $5,251. At 5.5 percent, monthly mortgage payments are about $5,378, up from $127 per month.

In Vancouver, where the Real Estate Board of Greater Vancouver said the benchmark home price was $1,114,300 last month, a 5.25 percent floating rate brings monthly mortgage payments to $5,312. At 5.5 percent, monthly mortgage payments reach about $5,441, up from $129 per month.

What should I expect if my mortgage is to be extended?

“There will be a situation where many people will experience a shock when extending their mortgage,” Zlatkin said.
Since interest rates have risen so much since you signed your current mortgage, you will now see that you will likely have to qualify at a much higher rate than before.
Zlatkin advised people who find themselves in this situation to start budgeting now.

“If you think you’re going to renew, if you realize the payment amounts are going to be too high and you can’t afford it, you may need to look at refinancing,” she said.

That may mean amortizing your mortgage over a longer period of time but not changing the amount you’ll pay, but she recommends discussing any potential change with your agent sooner rather than later.

“You don’t want to get caught in a set piece, so you want to be very proactive,” she said.

Should I switch between a variable and a fixed-rate mortgage?

“In an environment of rising interest rates, many people often opt out of adjustable rate mortgages,” Zlatkin said.
However, she believes such a switch no longer makes sense for most people because interest rates have risen so much. When interest rates were around 2 percent last year, it was “super cheap” to cancel an adjustable rate mortgage. Now that interest rates have risen so much, it will cost between one and one and a half percent to break out of an adjustable rate mortgage.

“It could just be the wrong timing,” said Zlatkin.

“Everyone’s circumstances are unique, but 80 percent of the time, you’ve missed the boat.”

This report from The Canadian Press was first published on January 25, 2023.