The Bank of Canada raised the overnight rate by 100 basis points (bp) today, July 13, bringing it to 2.5 per cent to rein in inflation that has shot up to 7.7 per cent.
The size of the increase caught the mortgage industry by surprise, according to Finders, which polled financial experts before the move was made,
While all economists predicted a rate increase, about three quarters on Finder’s BoC Interest Rate Forecast panel believed the bank would raise by 75 bp.
“Absolutely none of them predicted a 100 bp increase,” Finders note in a July 13 statement.
“An increase of this magnitude in one meeting is very unusual,” Bank of Canada governor Tiff Macklem said in a press conference an hour after the rate decision was released, adding a rate-hike of 100 bp reflects “very unusual economic circumstances.”
Rate-hikes so far this year have already had a notable, negative impact on B.C.’s real estate industry.
Home sales across the province plummeted 35.7 per cent in June compared with a year earlier as mortgage rates have shot up amid ongoing rate-hikes in 2022, according to data from the B.C. Real Estate Association (BCREA).
“While a still growing economy and robust population growth point to strong demand, it is increasingly difficult to satisfy that demand at current interest rates,” BCREA chief economist Brendon Ogmundson said in a July 12 statement.
“Consumers can expect to see most variable rates move up to a roughly 3.35 per cent to 4.00per cent range. Refinances could be even higher,” said Sung Lee at Rates.ca licensed mortgage agent. “The latest rate hike will push even more homebuyers to qualify above the current stress test rate and will likely slow home sales even further in most parts of the country. The size and frequency of the rate hikes we’re seeing this year are beginning to play a psychological number on consumers, causing them to wait on the sidelines rather than purchase now.”
Variable rate mortgage holders who have now been impacted by their fourth payment increase this year may want to explore their options if they can’t handle any more rate increases, Lee added.
“Bond yields have seen a dip recently and some lenders are taking advantage of this and are sending out fixed rate specials,” said Lee. “As the overnight rate pushes variable rate mortgages up, we’ll likely see more interest in fixed-rate mortgages than in recent months.”
For those getting a new mortgage or coming up for renewal, shorter-term fixed rates or a hybrid mortgage (a mix of fixed and variable rates) should be on their radar.
“Rates are cyclical and at some point, they will come back down. Until then, work with a mortgage professional who can help you understand all the options and who can guide you through these turbulent times.”
Rates.ca provided the following example of a rake hike impact:, a homeowner with a five-year fixed-rate mortgage of 1.99 per cent on $500,000 with a 25-year amortization will have monthly payments of approximately $2,155. If they renew five years later at a rate of 3.99 per cent with approximately $418,762 still owing on the mortgage, monthly payments will be approximately $2,528, a difference of $373.