Navigating New Mortgage Rates

Rate Increases

The Bank of Canada has increased its target for the overnight rate to 5%, along with the Bank Rate at 5¼% and the deposit rate at 5%. This decision comes as global inflation eases, but robust demand and tight labor markets lead to persistent inflationary pressures in services. 

Canada’s economy has shown stronger momentum, with strong consumption growth and a pickup in the housing market. However, the Bank expects consumer spending to slow due to cumulative interest rate increases. The labor market shows some signs of increased worker availability, but conditions remain tight. Immigration contributes to both demand and supply in the economy. 

As interest rates continue to impact the economy, the Bank foresees a slowdown in economic growth, with projected real GDP growth of 1.8% in 2023 and 1.2% in 2024. Inflation in Canada has eased, but core inflation rates remain higher than anticipated, indicating persistent underlying price pressures. 

The Bank aims to return to its 2% inflation target, and in light of persistent excess demand and elevated core inflation, they have decided to increase the policy interest rate to 5%. The Bank will continue to assess inflation dynamics and factors such as excess demand, inflation expectations, wage growth, and corporate pricing behavior. They are committed to restoring price stability for Canadians while normalizing the balance sheet through quantitative tightening. The next interest rate meeting will be held on September 6th

Mortgage Impacts

When interest rates increase, it generally leads to higher borrowing costs for consumers, including those with mortgages. Here are some potential impacts on mortgages due to higher interest rates: 

  • Increased Monthly Payments: If you have a variable or adjustable-rate mortgage, your monthly payments may increase when interest rates rise. This is because the interest portion of your mortgage payment will be higher, resulting in an increased overall payment amount. Fixed-rate mortgages will not be directly affected by rate hikes since the interest rate remains constant throughout the loan term. 
  • Affordability Challenges: Higher interest rates can make it more challenging for individuals to qualify for a mortgage or afford the home they desire. As mortgage payments increase, the debt-to-income ratio also rises, potentially limiting borrowing capacity and reducing affordability for prospective homebuyers. 
  • Refinancing Considerations: Homeowners with existing mortgages may consider refinancing to secure a lower interest rate before rates rise further. However, if interest rates have already increased significantly, refinancing may not provide as much cost savings as before. 
  • Slower Housing Market: As borrowing costs rise, it can dampen demand for homes, potentially slowing down the housing market. Higher interest rates may discourage potential buyers from entering the market, leading to reduced housing activity and potentially impacting property values. 
  • Impact on Variable Rate Mortgages: Homeowners with variable rate mortgages will be directly affected by interest rate hikes. These mortgages are typically tied to a benchmark rate (e.g., the prime rate) plus a predetermined margin. As the benchmark rate increases, the interest rate on variable rate mortgages will also rise, resulting in higher monthly payments. 
  • Fixed-Rate Mortgage Stability: Homeowners with fixed-rate mortgages are protected from interest rate hikes during the agreed-upon term. Their interest rate remains the same, providing stability and predictability in mortgage payments. 

What to do next?

It’s important to note that the extent of the impact will depend on the magnitude and frequency of interest rate increases, as well as other factors in the housing market and overall economy. It’s advisable for homeowners and potential buyers to stay informed about interest rate trends and consult with mortgage professionals to assess their specific situation and options. Working with a realtor is your best opportunity to learn when the market is right for you. 

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