This is the most we’ve ever talked about interest rates, because let’s face it. That conversation is as exciting as watching water freeze! And at the moment, watching water freeze is a good reprieve from the summer heat.
But today, July 13, there was some big news that we think you should be aware of.
The Bank of Canada (BoC) announced a supersized rate hike of 1% in its policy rate.
In layman’s terms, this means if you have a variable rate mortgage, or any type of loan or line of credit that floats with the Prime rate, your rate is about to increase by 1%.
That’s kind of a big deal.
Most people in the industry expected a .75% increase today which was already going to be one of the most aggressive rate hikes in years, but the 1% was a surprise to most.
The reasoning is to try and stave off rampant inflation and curb sharp increases in consumer price growth before they get out of hand.
Canada’s inflation rate recently hit a 39-year high. Unless you’ve been living in a cave, you observe this every day from the price at the pumps, to your coffee going up at Timmy’s.
What Does This Mean For You?
Well, if you have a variable rate mortgage, it means you’ll soon be receiving a communication from your lender telling you your payment is going to change.
How much?
Of course, that depends on a few factors.
An average variable rate mortgage of $350,000 on a 25-year amortization will see about a $185 increase in their payment soon.
There’s a secondary result to this announcement that affects homeowners whether they have a variable or fixed rate mortgage which is the value of your home.
We have already started to see how rising fixed rates have started to cool down the real estate market, especially in the red-hot markets of Vancouver, Victoria, Montreal, and all of Southern Ontario.
Now with variable rates becoming more expensive you have the double whammy of buyers maybe waiting to buy until rates are more in their favour combined with the fact it will soon change the qualifying rate, we as brokers are required to use to qualify our clients.
Being able to qualify for less of a mortgage will inevitably soften housing prices as well.
What Was the Bank Thinking?
Well first the Canadian government for the most part is ‘OK’ with cooling the housing market.
It was becoming unsustainable, and in the long run this might not be a bad thing. They had the foresight to mandate us to start qualifying our clients at a much higher rate a few years ago in anticipation of this.
For many of you, whether you know it or not, we’ve already made sure your income could support these rate hikes.
Secondly, and quite frankly they had no other choice.
The government only has one trick up its sleeve for rapid inflation, and that’s to hike interest rates.
The 1% was more than most experts predicted, but we were going to get there at the next BoC rate announcement in September anyway.
Also, we hate to be the bearer of bad news, but there are still more rate hikes to come.
So, what do you do?
Well as always, if you have a variable rate mortgage you can explore the option to
lock into a fixed rate, but as indicated above they have been rising for most of the year and you’re still better off weathering the storm in a variable type of product.
But there are more hikes coming, so it’s worth a conversation with us about what your options are.
You can also look at this as an opportunity.
In many markets, the real estate market had become completely insane. A dozen offers on a property with the final price being several hundred thousand over list price was something that simply couldn’t go on.
Now with prices easing, it might be a time to think about buying again or looking into a rental or vacation property.
Your payment will be more than it would have been earlier in the year, but in the long term game, starting with a lower purchase price is always more beneficial than having to ride out a couple years of higher rates until inflation is under control.
These are complicated scenarios, with complicated answers, so as always talk to the people you trust the most in real estate, accounting, and finance to figure out what’s best for you.
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