Canadians who watched the cost of taking out a mortgage steadily increase over the last year were dealt another blow when the Bank of Canada upped its interest rate to 4.5 per cent Wednesday.
The hike is the eighth in less than a year and was accompanied by the central bank saying the rate will likely remain at 4.5 per cent unless Canada’s stubbornly high inflation rate doesn’t fall to its two per cent target.
The interest rate increase is bound to weigh on prospective homeowners and mortgage holders because mortgage rates tend to move in tandem with interest rate changes.
Here’s a look at what Wednesday’s announcements will mean for the mortgage sector.
What does this announcement mean for people with mortgages?
An interest rate hike like this one will typically bring about a lot of stress, said Leah Zlatkin, a mortgage broker with LowestRates.ca,
Homeowners with variable rate mortgages, which fluctuate, have seen their rates increase substantially from last year.
Many have already seen their amortization extend as rates have gone up because while their payments have remained steady, they have paid down less principal.
The danger becomes when these people hit their trigger point — when 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 variable mortgage holder expect their mortgage to rise by as a result of these changes?
For every $100,000 of a mortgage with a variable rate, homeowners should expect to pay $20 more per month, LowestRates.ca said.
The company completed several calculations assuming someone had a 15 per cent down payment under $1 million and a 25-year amortization period.
Based on the Canadian Real Estate Association saying the average Canadian home sold for $626,318 last month, a variable rate of 5.25 per cent will mean monthly mortgage payments will total $3,261. At 5.5 per cent, monthly mortgage payments become about $3,341, an increase of $80 per month.
In Toronto, where the Toronto Regional Real Estate Board found the average home sold for more than $1.1 million in December, a variable rate of 5.25 per cent equates to monthly mortgage payments of $5,251. At 5.5 per cent, monthly mortgage payments become roughly $5,378, an increase of $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 variable rate of 5.25 per cent brings monthly mortgage payments to $5,312. At 5.5 per cent, monthly mortgage payments reach about $5,441, an increase of $129 per month.
If my mortgage is about to be up for renewal, what should I expect?
“There’s going to be a situation where a lot of people may be experiencing shock when they renew their mortgage,” said Zlatkin.
Because rates have increased so substantially since they signed their current mortgage, they will now see that they likely have to qualify at a much higher rate than before.
Zlatkin recommended that people who foresee themselves in this situation start budgeting now.
“If you think that you’re going to renew when you realize that the payment amounts are going to be excessive and you’re not going to be able to afford it, you may need to look into refinancing,” she said.
That can mean amortizing your mortgage over a longer period of time, but not changing the amount you will pay, but she recommends discussing any potential change with your broker sooner rather than later.
“You don’t want to go into a default situation, so you want to be very proactive,” she said.
Should I switch between a variable rate and fixed rate mortgage?
“In a rising rate environment, many people are often opting away from variable rate mortgages,” said Zlatkin.
However, she thinks making such a switch no longer makes sense for most people because rates have risen so sharply.
When interest rates were around two per cent last year, it was “super cheap” to break a variable rate mortgage. Now that rates have increased so substantially, it’s going to cost between one and one and a half per cent to break out of a variable rate mortgage.
“It might just be the wrong time,” Zlatkin said.
“Everybody’s circumstances are unique, but in 80 per cent of cases you’ve missed the boat.”
—Tara Deschamps, The Canadian Press