The Bank of Canada’s move to hike its policy rate by 50 basis points Wednesday will be quickly noticed by variable-rate mortgage holders and Canadians holding a home equity line of credit, but if inflation persists and rates have to rise more quickly — something the central bank’s chief acknowledged was a possibility — the effects are not likely to stop there.
“Higher and faster rate hikes will affect mortgage affordability for a significant population of homebuyers,” RatesDotCA mortgage agent Sung Lee told the Financial Post in an e-mail. “Major banks have already pushed fixed rates higher several times over the past few weeks with some approaching the four per cent mark for uninsured products.”
The Royal Bank of Canada and Toronto-Dominion Bank were the first of the Big Six to react to the shifting interest rate environment, lifting their prime rates by 50 basis points to 3.20 per cent starting on Thursday, with Scotiabank and CIBC quickly following suit.
But the ripples from the rate increase could extend beyond mortgage carrying costs.
James Laird, co-founder of Ratehub.ca, noted that higher mortgage rates are expected to put downward pressure on home prices across the country. The national average price of a home reached $816,720 in February, according to figures from the Canadian Real Estate Association.
And here could be more pressure weighing on Canadian home owners as Bank of Canada Governor Tiff Macklem said he was prepared to get more aggressive with interest rate policy depending on how the economy recovers and how the outlook for inflation, which stood at a 30-year high of 5.7 per cent in February readings, evolves.
“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening once we get closer to the neutral rate and take stock,” Macklem told reporters during a Wednesday press conference. “On the other hand, we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target.”
The Bank of Canada estimates that a neutral rate stands between two per cent and three per cent. Macklem suggested the benchmark rate could rise above that range, potentially taking the overnight rate to 3.25 per cent.
“Rates are going up this year, but we do not know what next year will bring. This creates a bit of a roller coaster experience for current and would-be homeowners,” wrote Leah Zlatkin, a licensed mortgage broker at LowestRates.ca. “These increased costs have a real impact on homeowners’ wallets. Some variable rate holders may think about switching to a fixed rate to bring some stability to their outlook, but anyone with variable rate will still be saving money over a fixed rate right now.”
Zlatkin added that if the Bank of Canada raises interest rates as much as 150 more basis points over the course of the year, it would bring prime rates to around 4.7 per cent.
“There is a whole cohort of home owners that have never experienced a mortgage rate over four per cent,” Allison Van Rooijen, vice-president of consumer credit at Canadian credit union Meridian, told the Financial Post. “It’s been so long since rates have been at the four per cent or higher range, and we’re starting to see that increase now on the fixed rate side and we expect it’s going to continue to persist.”
Van Rooijen added that the good news is lenders typically look for financial resiliency with their clients and ensure borrowers can withstand rate increases. However, if mortgage holders are beginning to feel a pinch in their monthly expenses, it could be time to seek out professional help and weigh their options.
“There has been a ton of innovation in in the mortgage space and the debt consolidation space even in the last five years,” Van Rooijen said. “There may be solutions borrowers aren’t aware of at this point in time that can help them before things get worse or before rates go up to a point that they’re really pinched.”
-Steph Huges, Calgary Herald