How the Bank of Canada’s interest rate hikes will affect your mortgage

The Bank of Canada in Ottawa on April 24, 2019.Sean Kilpatrick/The Canadian Press

The Bank of Canada is set to raise its benchmark interest rate on Wednesday for the first time since 2018, a move that will affect the cost of borrowing for various loans, including mortgages.

Since the early days of the pandemic, the bank’s benchmark rate – also known as the policy rate or prime rate – has stood at 0.25%, matching a record low set in the aftermath of the financial crisis. world of 2008.

These ultra-low rates have no doubt fueled the housing market, which has seen frenetic activity and rapid price increases for most of the past two years, despite the economic difficulties.

Now things are changing, with a series of rate hikes expected this year and next. With that in mind, here’s a guide to how rising rates will affect homeowners and potential buyers.

Homeowners with Fixed Rate Mortgages

There is no immediate impact on payments for existing mortgages. It is only when the mortgage comes due that higher rates will affect payments.

The interest rate for fixed rate mortgages is influenced by the interest rates on bonds issued by the federal government, not by the Bank of Canada’s benchmark rate.

But if the central bank is confident enough in the economy to start raising the overnight rate, expect bond market interest rates to rise as well. This explains how a rise in the overnight rate can indirectly affect fixed rate mortgages.

How will your mortgage payments change?

For those who have a fixed rate mortgage due for renewal, we have created the following tool to see how your monthly payments might change.

First, determine the amount of mortgage remaining at the start of your next term and the remaining amortization. (Talk to your mortgage lender to find out or use a calculator like this to get a rough idea.) If you want to compare mortgage payments, check your mortgage statement to find your current monthly payment. Finally, experiment with higher interest rates than you are currently paying.

*Notes: The calculation assumes semi-annual capitalization. Results are for illustrative purposes only. Contact your mortgage broker for an official figure.

Homeowners with Variable Rate Mortgages

The interest cost on variable rate mortgages is indexed to your lender’s prime rate, minus the discount you negotiated. The prime rate is guided by the Bank of Canada’s benchmark rate. Payments on certain variable rate mortgages will be adjusted upwards within days or weeks to reflect an increase in overnight and prime rates.

With other variable rate mortgages, the payments remain the same for the duration of the term. But there are adjustments going on in the background. As rates rise, more of your payment goes to interest payments and less to principal. This will increase the time it takes to pay off your mortgage, unless you increase the renewal payments.

One final note: The Toronto-Dominion Bank is an example of a lender that has a “prime mortgage rate,” a single internal rate used to price variable rate mortgages. TD’s mortgage prime rate was higher than its conventional prime rate.

Potential buyers

Recent buyers have already seen how quickly mortgage rates can change. Some of the best rates on five-year fixed rate mortgages are around 2.7%, while many Big Six banks offer loans above 3%, according to At times during the pandemic, the major banks had announced five-year fixed-rate mortgages at less than 2%, a sign of market developments amid higher inflation.

By comparison, variable rate mortgages have lower interest rates, and their discount to fixed rate mortgages has especially increased in recent times. (Most five-year variable rates at discount brokerages are 1.35%, at least for now, according to Ratehub.) Mortgagers have certainly taken notice: In recent months, a slight majority of borrowers chose variable rates.

Is variable still the way to go? It’s debatable. If the Bank of Canada is forced to raise rates aggressively to control inflation, this could eventually negate the benefit of variable rate mortgages.

Ultimately, hopeful buyers must pass a stress test of their ability to pay mortgage payments at higher interest rates. Borrowers are tested at 5.25% or their negotiated mortgage rate plus two percentage points – whichever is higher.

Are you still planning to enter the market? Here’s a tool to show how your monthly mortgage payments would differ at different interest rates.

Simply enter the mortgage amount (the purchase price of the home minus your down payment) and the amortization period.

Monthly cost for a 25One-year mortgage at various interest rates

*Note: Mortgage default insurance fees are not included here. The calculation assumes semi-annual capitalization.

Breakdown of the mortgage market

Despite the recent popularity of variable rates, about seven in 10 borrowers have a fixed rate mortgage, according to survey results published in 2021 by Canada Mortgage and Housing Corporation. A slight majority of mortgagors have a term of five years.

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