How another interest rate hike could affect your mortgage

Another interest rate hike from the Bank of Canada means some Canadians could be spending a lot more on their monthly mortgage bills.

“The most immediate impact will be for holders of variable rate mortgages,” James Laird, co-CEO of Ratehub.ca and president of mortgage lender CanWise, told CTVNews.ca by phone Tuesday.

“It is almost certain that when the Bank of Canada makes this announcement, the various mortgage lenders across the country – banks, credit unions, trust companies – will all change their prime rates by the same amount.”

Analysts widely predict that interest rates will be raised by three-quarters of a percentage point to 3.25% on Wednesday. Aimed at fighting inflation, the increase follows a full one percentage point hike in July, which was the largest single rate hike in Canada since August 1998. The Bank of Canada has begun raising rates interest rates in March, after they fell to 0.25% during the COVID-19 crisis. -19 pandemic.

For those with adjustable rate mortgages, an interest rate of 3.25% could mean spending thousands of dollars more per year.

According to Ratehub.ca online mortgage calculatorIf you bought a $630,000 home with a 10% down payment and a 3.5% variable rate over five years, payable over 25 years, your monthly mortgage bill would increase by $236 per month, from 2 $919 to $3,155, which means you would be spending $2,832 more per year on mortgage payments.

If the Bank of Canada decided to only raise interest rates by half a percentage point to 3%, the same owner would still be paying $156 more per month, or $1,872 more per year. The average house price in Canada in July 2022 was $629,971, according to the Canadian Real Estate Association. Obviously, those with more expensive homes should expect to pay significantly more.

“By the size of your mortgage, the more you’re going to feel it,” Laird said.

Those with a home equity line of credit will also be affected, Laird notes, and rising interest rates will also make it harder to pass a “stress test” and qualify for a mortgage.

Variable rate mortgages have interest rates that fluctuate over time, compared to fixed rate mortgages where the interest rate is locked in from the start.

“Historically speaking, it’s usually the cheapest option,” Laird said of adjustable rate mortgages.

Whether this continues to be the case depends on how long inflation affects Canadians.

“If inflation persists, the Bank of Canada will have to keep raising rates, and in that scenario, the fixed rate is likely to be the best bet,” Laird explained.

Conversely, if inflation is under control, Canadians can expect lower interest rates.

“And then further down, if you think a recession could come in 2024, then the variable rate is going to outperform because when the economy slows down, the bank actually lowers the interest rate,” Laird said. “So high inflation equals high rates, and a slowing economy equals lower rates.”


With files from Canadian Pres


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