The Bank of Canada recently increased the overnight rate to 2.5 per cent. This was a 100 basis point rise, surprising everyone as most people were planning for a 75 basis point increase. It’s been an intense year so far for mortgage holders, who have seen the overnight rate jump from 0.25 per cent to 2.5 per cent in a matter of months. Now, the question is how this increase will affect borrowers, and specifically borrowers with a variable-rate product. Here’s what you need to know about mortgage payments going forward.
How will your mortgage payments change?
If you have a fixed-rate mortgage, your payments will remain the same. If you have a variable rate, your monthly payments will increase once again. A one per cent increase to the prime rate means that for every $100,000 on your mortgage, your payment will increase by an extra $55 each month. Here’s how your payments might look.
|
Mortgage amount |
Monthly increase |
|
$100,000 |
~$55 |
|
$200,000 |
~$110 |
|
$300,000 |
~$165 |
| $400,000 |
~$220 |
| $500,000 |
~$275 |
Most experts were predicting a 0.75 per cent increase to the overnight rate. The Bank of Canada is aggressively trying to lower inflation, and is sending the message that Canadians need to stop spending. The hope is this rate increase will discourage extra spending, which contributes to demand and inflation. The bank also said it will continue to increase rates if inflation persists.
When will rates stop rising?
We can’t say for sure when rates will stop increasing, as it largely depends on inflation trends. However, we may be reaching the peak of rate hikes. Fixed rates are starting to settle, based on bond yield decreases due to concerns over an upcoming recession. Should we encounter an economic downturn, inflation and rates will both fall once again. Variable rates will take a bit longer to drop than fixed rates, as they are based on the bank’s decisions, and the bank will only lower rates once inflation decreases. 2023 should definitely see a lowering in rates.
What are your options in the meantime?
What should you do as a borrower until rates and inflation are under control? If you have a variable rate, I wouldn’t necessarily recommend switching to a fixed rate, even as rates increase. Should we experience a recession, variable rates will fall once again, ultimately becoming lower than today’s fixed rates. Most borrowers can likely hang on to their variable rate right now. If you’re worried about making mortgage payments, I encourage you to sit down and try to create a budget that works for you. Look for ways to limit your spending while rates are high. Budgeting apps are often useful for this.
Times like these can be stressful, but I want to emphasize once again that this trend cannot go on indefinitely. Inflation and rate hikes might persist for now, but they also must come down at some point. Borrowers will experience a relief in their payments once we see these things settle. Until then, do your best to budget for these extra expenses. You can also reach out to me if you have concerns about your current mortgage! We can discuss your options and your best move going forward.
If you have any questions about your mortgage, get in touch with me!