Canadians with mortgages brace for big Bank of Canada rate hike

The Bank of Canada is preparing to announce its next interest rate change on Wednesday. Bay Street forecasters anticipate a 50-basis-point increase to put Canadians who have variable rate mortgages on edge. This will also keep some potential homebuyers off the sidelines.

Variable rate mortgages are tied to Bank of Canada’s decision “interest rate hikes will begin to bite soon,”Robert Kavcic is the senior economist at BMO Capital Markets. He spoke to us in an interview.

Canada’s largest mortgage lenders, the big banks, have already raised their prime rate to 2.45 percent from 2.70% after the Bank of Canada increased its overnight rate to 0.50% in March.

This sets the scene for increased pressure on borrowers on Wednesday.

Based on the 2.70 percent prime rate and a one-percent discount — lenders typically offer discounts of 0.60 to one percent — a homeowner with variable rate mortgage would see their monthly mortgage payment go up from 1.45 to 1.70%, says Leah Zlatkin.

“On a home priced at $800,000 with a 15 per cent down payment amortized over 25 years with that variable rate in place, it’s an increase of about $85 per month,”She said this in an interview. An additional half-point would mean an additional $170 per month.

Zlatkin said that homeowners who have to renew their fixed rate mortgage for five-years will likely dig deeper into their pockets in the near future.

She also said that Canadians who have used the pandemic money to save money to make a down payment on a house may find it difficult to stretch that money in a rising interest rate environment.

Although the Bank of Canada’s primary goal is to tame inflation, higher interest rate could have a cooling effect overall on Canada’s hot housing markets. BMO’s Kavcic says that he already sees this effect.

The central bank last raised the overnight rate by half an percentage point in one sitting in May 2000. At that time, nominal neutral rate was around 5%. This is the level of interest that allows full productivity while keeping inflation on target. The Bank of Canada currently estimates that the nominal neutral rate is between 1.75 percent and 2.75 percent.

“A 50 (basis point) hike will do a lot more to cool the economy down today than it did back then,”Royce Mendes (head of macro strategy at Desjardins), wrote a note.

Mendes also said that the Bank of Canada will likely slow down the pace of its tightening of monetary policy after April, and that they expect to do so. “further rate hikes to come in measured steps.”

“That would leave the overnight rate at 2.00 per cent at the end of the year,”He said.

Andrew Kelvin, TD’s chief Canada strategist expects that the central bank will raise the overnight rate to 2.50 percent by the end of this year.

The federal Liberals announced last Thursday that they would be spending approximately $60 billion on their 2022 budget. This includes measures to increase affordability and lower living costs.

Some economists see the extra government stimulus as contributing to the ongoing inflation problems. The Bank of Canada actively works to reduce these issues. However, other economists do not see spending or new programs in the budget as significantly changing the course of the central bank.

This report was first published by The Canadian Press on April 12, 2022