The Bank of Canada has raised its overnight lending rate to 5%—the highest level in 22 years.
The announcement came on Wednesday, July 12, marking the second month in a row the trendsetting interest rate has risen by 0.25%.
“CPI inflation is forecast to hover around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in the January and April projections,” the Bank of Canada stated.
Industry experts—including the Canadian Real Estate Association’s (CREA) economists—had recently predicted the Bank would make such a move, but looking back earlier this year, you’d be forgiven for believing the hikes were over.
Following an increase in January, Bank of Canada Governor Tiff Macklem announced the central bank was going to “pause” its campaign of rate hikes, leaving the lending rate at 4.5%. That “pause” ended in June with a surprise 25 basis points hike, followed by Wednesday’s announcement (less surprising) of a further 25 bps hike to bring the lending rate to 5%.
“We’ve come a long way, and we don’t want to squander the progress we’ve made. We need to stay the course to restore price stability for Canadians,” Macklem said during the Monetary Policy Report media conference.
He explained the decision was based on two “broad considerations.” The first being stubborn, underlying inflationary pressures, and the second reason being a desire to balance the risks of under- and over-tightening monetary policy.
What impact does this have for homeowners and home buyers?
The immediate impacts for home buyers are increased borrowing costs, which determines how much home a first-time buyer can afford. With increasing home sales and lower-than-normal supply, buyers had been feeling the pressure once again during the spring market.
The good news? Supply is opening up. According to CREA’s national statistics released on Thursday, June 15, the number of newly listed properties rose 6.8% month-over-month.
Current homeowners with a variable mortgage will also see another increase to their mortgage payments, and those looking to renew their mortgage may be in for quite a sticker shock if they were able to lock in rates around the 2% levels seen just a few years ago.
Following the Bank of Canada’s announcement, CREA Senior Economist Shaun Cathcart told the REALTOR.ca Living Room blog, “The latest 50 basis points of rate hikes will not be as easily absorbed as 50 or maybe even 100 basis points of hikes would have been a year ago. Interest rate hikes are cumulative, and policymakers must be wondering how close we are getting to the straw that breaks the camel’s back for some mortgage holders.”
CREA’s Senior Data Engineer Chris Jokel previously explained it this way to us: “If you’re an existing homeowner, you already have equity in your home. Whether prices go up or down, whether rates go up or down, that tide lifts all boats and falls just the same. However, this may impact current homeowners with fixed mortgages who are thinking twice about selling and buying a new place because their mortgage rate will increase.”
How much does this affect your mortgage?
Let’s do a bit of math here. The average price of a Canadian home in May was $729,000 (excluding the Greater Toronto Area and Greater Vancouver cuts almost $150,000 from that national average price). We’ll round to $700,000 for this example.
If you were to put 10% towards a down payment and chose a five-year fixed rate, the latest interest rate increase equates to a payment of about $100 extra on a monthly payment, according to REALTOR.ca’s Mortgage Calculator (give it a try).
Are more interest rates in store?
Can you handle the truth? Cathcart offered up some words of caution.
“Perhaps most importantly for gauging the impact on the housing market, the statement accompanying the decision made no indication that there would now be a pause, and the next decision is not until September.”
