How the Bank of Canada’s rate hike will affect mortgages, loans and spending

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TORONTO — The Bank of Canada raised its key interest rate by one percentage point on Wednesday, the biggest hike the country has seen in 24 years.

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The move signals the central bank will take a more aggressive approach to tackling inflation, which is at a 39-year high of 7.7% and has made groceries, vacations and other purchases more expensive.

The rise to 2.5% will also affect mortgages, loans and spending habits.

Mortgages

Commercial banks and other financial institutions typically raise or lower their mortgage rates in tandem with Bank of Canada interest rate hikes.

The rate hike means consumers should expect most variable rates to hit a range between 3.35 and 4%, mortgage officer Sung Lee said in a statement to Ratesdotca.

Leah Zlatkin, licensed mortgage broker at Lowestrates.ca, said in a statement that every $100,000 someone has in a variable rate mortgage will result in about $55 more in costs per month.

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Based on the average home price of $711,000 in May according to the Canadian Real Estate Association, a variable rate of 2.7% will result in monthly mortgage payments of approximately $2,845. At 3.7%, which she considers the best mortgage rate, those payments will total $3,168, an increase of $323 per month.

While people with variable mortgages will be affected, anyone whose mortgage rate is up for renewal is also likely to experience “sticker shock,” said Laurie Campbell, director of client financial wellbeing at the consultancy. Bromwich+Smith.

“It will be a situation where a lot of people are going to wonder if they can continue to afford this house,” she said.

“We’ve seen 10 years of continuous housing increases and the housing market go astronomically crazy. Now, it will undoubtedly stabilize with these increases in interest.

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During the COVID-19 pandemic, Campbell has seen people dipping into their home equity, so some have a traditional mortgage and a second mortgage on their property. If there is a correction in the housing market, she fears they will end up owing more on their home than the property is worth.

Loans

People who have variable rate lines of credit, personal loans or car loans are all affected by interest rate increases.

“A lot more of their money is going to go to interest and they probably want to increase their payment, if they can, to cover that and make sure they get rid of that debt quickly,” Campbell said.

This will be no small feat for some Canadians. Campbell said she had seen studies indicating that Canadians were more in debt than ever before, and that for every dollar someone in the country earned, they owed an average of $1.86.

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“Individuals are really going to have to get down to business and figure out how to manage all this debt,” Campbell said.

If you can’t repay your debt and your financial situation isn’t about to improve, she recommends seeking help from a licensed insolvency trustee.

Expenses

Between inflation, supply chain issues, shortages, and rising prices, most goods and services are getting more expensive.

However, as pandemic-related restrictions ease, people are eager to venture out of their homes, get together and partake in their favorite pastimes again.

“I guess in the short term people will continue to spend because it’s summer, people like to be outside and enjoy that time of year,” Campbell said.

“However, I say this with caution. I think we’re going to see debt levels go up and there’s going to be a reckoning where people have to cut spending because inflation is really killing us and making it really hard for us to make ends meet.

This report from The Canadian Press was first published on July 13, 2022.