Massive interest rate hike adds financial hardship to some Canadians

Increase in the hiccups of highly indebted consumers who took out large mortgages during the pandemic

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OTTAWA – The Bank of Canada’s surprise interest rate hike this week rattled heavily indebted consumers, who took out large mortgages during the pandemic but were less prepared for the sharp rise in borrowing costs than Bay Street investors.

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Higher rates are also dampening Canada’s once-hot housing market and, as consumers feel the pinch, could slow spending on travel, dining and luxury goods.

The central bank on Wednesday raised its key rate by 100 basis points to 2.5%, its largest increase in nearly 24 years. Its aim is to crush hot inflation, which hit a four-decade high of 7.7% in May, with the bank promising more hikes to come.

Money markets are betting on three more increases this year to raise the key rate from 3.5% to 3.75% by the end of the year.

“There is going to be a lot of pain there. And I think the bank is underestimating the risks to housing and consumption,” said Stephen Brown, senior Canadian economist at Capital Economics.

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There’s gonna be a lot of pain there

Stephen Brown, Economist, Capital Economics

The movements sent mortgage rates spiral, a concern for Canadians with variable-rate mortgages, which accounted for about 50% of new mortgages in Canada in May, compared to about 7% before the pandemic, according to official data.

“I’m distraught,” said Udit Kumar, who bought a home in suburban Toronto this spring. The rate on his variable mortgage has already gone from 1.84% to 3.4% in just a few months.

“We are now in a situation where our home values ​​could go down and mortgages go up,” he said.

We now find ourselves in a situation where our home values ​​could go down and mortgages go up.

Udit Kumar, owner

Most Canadians with variable mortgages have static payments: as rates go up, the monthly payment stays the same, but less principal is paid. But about 20% of variable loans are not static, which means each increase can add hundreds of dollars to a payment.

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For example, a monthly payment of $2,845 (US$2,171) for a typical home will increase by $323 due to the huge hike, according to Lowestrates.ca.

Toronto-area mortgage broker Ron Butler said he’s already hearing people worry about having to sacrifice groceries to pay their mortgage. But while the situation is painful for many, he does not foresee a wave of defaults due to record unemployment in Canada, he said.

“In the history of the banking industry in this country…rate hikes haven’t had a massive impact on mortgage defaults. No matter the speed and size. »

Yet, with social media abuzz with people lamenting their suddenly oversized payments and plummeting home values, real estate agents say Wednesday’s 100 basis point rise has cast a new chill on the already down property market. in Canada.

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“Everybody freezes when that happens,” said Dan Plowman, owner of a real estate agency in Durham, a suburb east of Toronto.

  1. There are concerns about what a combination of rising rates and falling house prices would mean for households who borrowed cheaply on lines of credit secured by their homes, also known as HELOCs.

    What the Bank of Canada’s Full Percentage Point Hike Means for the Housing Market and Your Mortgage

  2. Tiff Macklem, Governor of the Bank of Canada, at the Bank of Canada in Ottawa in April.

    Exclusive: Tiff Macklem on the Bank of Canada’s surprise rate hike, the fight against inflation and his missed forecasts

  3. The Bank of Canada building in Ottawa.

    The Bank of Canada opts for a sharp hike to counter inflation

  4. Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers appear before the House Standing Committee on Finance.

    What economists say about the Bank of Canada’s sharp rate hike

The average sale price in the Toronto area fell 14.1% in June from the peak in February, reversing some of the region’s large pandemic gains.

Capital Economics’ Brown expects national house prices to fall about 20% from peak to trough and he worries that the Bank of Canada may be sacrificing the housing market too quickly in order to calm inflation.

But a cooling may be exactly what the Bank of Canada is looking for. Senior assistant Carolyn Rogers reiterated on Wednesday that restoring balance to the Canadian housing market would help curb the excess demand that is fueling inflation.

“And that’s what we aim to do,” she said.

© Thomson Reuters 2022

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