What the interest rate hike means for mortgage holders, home hunters


Published June 7, 2023 at 1:28 pm

The Bank of Canada hiked its key interest rate Wednesday by a quarter percentage point, bringing the rate to 4.75 per cent — the highest it’s been since April 2001.

The hike is aimed at quelling inflation, which has proved stubborn, not moving down quickly enough toward the central bank’s target of two per cent.

However, the hike is also bound to weigh on those hunting for homes or holding mortgages.

What does the interest rate have to do with my mortgage?

Mortgage rates tend to move in tandem with interest rates, so when one goes up, the other is likely to follow.

Canadians buying homes have two kinds of mortgages they can choose between — fixed rate or variable. Fixed-rate mortgages allow borrowers to lock in the interest rate they will pay for a set amount of time, while variable-rate mortgages fluctuate with interest rates.

What does this mean if I have a variable rate mortgage?

While banks have yet to announce how they might change their mortgage rates in response, those with variable rate mortgages will see their interest rates increase to absorb the rate hike, said James Laird, co-chief executive of rates comparison site Ratehub.ca.

He estimates a homeowner who had a 10 per cent down payment on a $716,083 home with a five-year variable rate of 5.55 per cent amortized over 25 years has a monthly mortgage payment of $4,075.

With today’s 25-basis point rate increase, the homeowner’s variable mortgage rate will increase to 5.80 per cent and their monthly payment will increase to $4,173. This means that the homeowner will pay $98 more per month or $1,176 per year on their mortgage payments, Laird said in a press release.

For those who have fixed payments on a variable rate mortgage, he predicts they will exceed their trigger rate if they haven’t already — the point where your payments are no longer enough to cover all of the interest you’ve accrued since your last payment. This means your entire mortgage payment is covering interest, so none of it is allocated toward principal.

What about if I have a fixed-rate mortgage?

“Fixed rates had already started to increase in anticipation of a possible rate hike and will increase further now that we know the bank has hiked rates,” Laird said.

This will impact anyone getting a fixed-rate mortgage, or renewing an existing one.

With the interest rate the highest it’s been in more than 20 years, “fixed rates are also higher than the rate that probably many people who are renewing are at right now,” said Olympia Baldrich, vice-president of retail products and real estate secured lending at TD Bank.

She recommends that people whose mortgages are coming up for renewal consider a rate hold, which locks in a mortgage rate for a certain period of time.

If I have a variable-rate mortgage, should I switch to a fixed-rate mortgage?

Every mortgage holder’s situation is different, said Baldrich.

For those concerned about mortgage payments, she urges people to review them with a mortgage specialist or financial adviser who can help determine whether to switch to another kind of mortgage.

They can also help you explore options for increasing your payments, making lump sum payments or slowing down your payments.

“Go look at your finances, take a step back and just look at your whole financial picture and what would it mean if rates continue,” she said.

I am looking for a home. What does this mean for me?

“The market sort of bottomed out at the beginning of the year and so home sales and home prices really hit bottom then, but confidence grew again (recently),” Baldrich said.

National home sales jumped by 11.3 per cent between March and April as the real estate market picked up again, but supply remained at a 20 year-low, the Canadian Real Estate Association said last month.

Seasonally adjusted sales for the month totalled 38,164 compared with 34,277 in March, while the average home price was roughly $716,000 in April, down 3.9 per cent from April 2022, but up $103,500 from January 2023.

Those who are wading into the market now can expect higher rates than others received in the months or years before, but it will be a few weeks before we start seeing the ramifications on the market, Baldrich said.

Laird expects the rate hit will put downward pressure on home prices.

This report by The Canadian Press was first published June 7, 2023.

Tara Deschamps, The Canadian Press

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