Every increase in the Bank of Canada’s key interest rate has an impact on the economy, inflation and the interest rates offered by financial institutions—including mortgage rates. Why are these increases taking place? What do economists expect in the coming months? As a homeowner, it’s normal and responsible to have questions. Here are answers to 4 important questions.
1. Why are mortgage rates going up?
When the price of goods and services like gas, groceries and housing rises, the cost of living goes up and this phenomenon is called inflation. Central banks (like the Bank of Canada) monitor these changes through the Consumer Price Index (CPI). Their objective: to keep annual increases usually between 1% and 3%—a stable growth to manage.
Central banks’ main leverage is their key rate, which financial institutions use to set interest rates for their products. “Most Western countries benefited from historically low interest rates during the COVID-19 pandemic. This decision was made to stimulate economic activity and support households and businesses, despite closures and restrictions,” said Isabel Cousineau, Product Manager, Home Financing Product Management.
Statistics Canada reports that in February 2022, Canada’s annual inflation rate rose to 5.4%, the highest since August 19911 and well above the target. At the same time, the average price of Canadian real estate jumped 19.4% in the last quarter of 2021 compared to year-end 2020 figures.
Against this backdrop, gradual rate hikes are to be expected to try to slow inflation in general. “High interest rates tend to encourage people to save and to borrow less,” says Isabel Cousineau. This tactic rebalances the economic cycle in the medium to long term.
2. What are the interest rate forecasts for 2022?
In early 2022, the Bank of Canada’s key interest rate sat at a record low of 0.25%. It increased to 0.5% in March, went up to 1% in April and rose again in June to 1.5%. In July, a further increase saw the rate soar to 2.5%.
However, anticipating the evolution of rates is a complex exercise that depends on financial markets and the monetary policies of central banks. External events such as geopolitical tensions also affect calculations. Our Desjardins economists have therefore already adjusted their forecasts a few times since the pandemic began. To make sure you get up-to-date information, check out the latest publications on economic and financial news.
3. What to do with rising mortgage rates?
Keep calm and carry on
For several years now, the assessment criteria for mortgage financing applications have been based on a rate higher than the one offered, in anticipation of a possible increase. “This means that your ability to repay has already been verified in the context of a higher interest rate,” explains Isabel Cousineau. In other words, your ability to absorb higher mortgage payments has already been assessed by your financial institution. So you shouldn’t worry if you still have leeway in your budget.
However, if your financial situation has changed in the meantime, you’ll have to do a full budget exercise. Feel free to contact an advisor for personalized support.
Rate increases don’t normally affect the payment amount. For a fixed-rate mortgage, the payment remains the same until it’s renewed. With a variable-rate mortgage, the payment amount is also fixed, and an increase in interest means that you’ll pay less principal on the loan with each payment. So, at the end of your term, your balance may be higher than initially expected. It’s therefore at the time of renewal of your mortgage financing that you should anticipate higher payments, taking into account your loan balance and higher rates.
See current mortgage rates here
4. What leeway do I have with respect to the increase?
Are you hesitating between a fixed and a variable rate?
A fixed rate remains the same for the entire term. You’ll know the exact amount of your payments and what the balance of your loan will be at renewal. This stability and peace of mind come at a price, since the fixed rate is higher than a variable rate available at the same time. Lastly, if you want to terminate your contract before maturity (for example, because you are selling your property), the indemnity payable is generally higher than with a variable rate.
If you can tolerate some fluctuation, a variable rate will save you interest as long as it remains below the fixed rate in effect at the time of signing. “You can take advantage of this period to increase the amount of your payments or to make prepayments and thus reduce the principal balance,” suggests Isabel Cousineau. “Every dollar you pay up front saves you interest throughout the loan term.”
Is your current mortgage financing at a variable rate?
Remember that your payments stay the same, even when rates go up. Instead, they affect how much you pay off your balance and cover interest.
Are you in the renewal period for your mortgage?
If you’re within 120 days of your mortgage maturity date, you can renew it now without having to pay a penalty. Your advisor can assess your situation and run simulations to help you choose a new mortgage that meets your needs.
After 120 days, you have to determine whether an early renewal will save you more than the amount you have to pay. The longer the remaining term, the higher the amount to be paid. Again, an advisor can make calculations based on current rates and your financial situation.
Estimate the mortgage penalty costs with our calculator.
It’s not just a matter of numbers: You also need to feel confident about the mortgage you’ve chosen, and about your budgeting in general.
Rising rates and inflation could compromise your buying power with respect to certain day-to-day expenses, undermine some of your plans and jeopardize their realization. Make an appointment with an advisor (hyperlink: https://www.desjardins.com/ca/locator/index.jsp#/ps) at any time to get personalized support that takes into account your future plans, your financial commitments, your borrower profile and economic forecasts.