With rising inflation and everything from housing to shelter costs, to appliances and even apples soaring in prices, the Bank of Canada (BoC) has finally made its first interest rate hike of 0.25% to curb inflation and cool the housing market. A move that is aimed at balancing the risk of financial instability with economic growth.
Why A Rate Hike Now?
- Canada hit a 30-year high inflation rate of 5.1% in January
- Overheated housing market with price increases already in January
- Strong employment growth and wages
- Lockdown restrictions lifting
- Supply chain disruptions expected to ease later in the year
What Does That Mean For Interest Rates?
When the Bank of Canada makes changes to their key policy rate, those with variable and adjustable-rate mortgages, and other forms of debt like HELOCs and credit cards, can expect to see a rise in rates.
Fixed rate mortgages are already on the rise – now averaging around 2.99% for insured, 3.10% for insurable and 3.25% for uninsured. Although the fixed rate is not pegged to the Bank of Canada key policy rate, the bond market has indicated that fixed rates will continue to rise this year.
How Will This Impact Homeowners?
Higher rates at renewal. If you have a fixed rate mortgage and your renewal date is coming up this year, you might want to consider locking in to a lower rate product today to protect you from rising rates in the future.
Payments are going to rise. Borrowers with variable-rate mortgages (VRM) and adjustable-rate mortgages (ARM) will either see an increase in their monthly payment or an extension of their amortization period (the time it takes to pay off your mortgage in full). Fortunately, VRM and ARM holders can move into a fixed rate option without penalty, so now’s a good time to speak with a Pineapple mortgage professional to formulate a plan that will deal with these hikes and save you money in the future.
Credit will cost more. Most Home Equity Lines of Credit (HELOCs) also have variable interest rates. If you have a (HELOC) you will need to understand if rising rates will impact your payments and whether that loan product is still going to be the best one for you in the days ahead. Refinancing to get better rates and to help you pay off your high-interest debts, can help ease the strain as borrowing costs go up.
How Will This Impact Home Buyers?
Rates are going to rise this year for home buyers, so if you plan to purchase in the near future, consider getting a pre-approval today to lock in a lower rate for the next 120 days. You might also want to start out with a fixed rate option that guarantees the same monthly payment over the term. VRM’s may have lower rates than fixed options today, but as those rates start to rise, either your mortgage payment or your amortization period will increase (the time it takes to pay off your loan in full). You can always move to a fixed rate mortgage at any time, but you’ll likely be switching to a higher rate than what’s available today.
How Will This Impact Investors?
The period of “cheap money” is coming to an end” with fixed rates for rentals moving north of 3.5% recently. BoC rate hikes will increase the cost of borrowing, locking in rates now can help investors hedge against rising rates and any Government restrictions that roll out in the months ahead. A Pineapple mortgage broker can explain how these changes will impact your portfolio and find ways to reduce your cost of borrowing and improve your cash flow through prepayment privileges and refinance strategies.
What To Do Next?
One rate hike will not be enough to tame inflation, which is why the Bank of Canada is planning to make a number of rate hikes this year. So get ready to review your budget and understand where your money is going and how rate increases will impact your cash flow.