Variable-rate mortgage holders with fixed payments, don’t have to worry about fluctuations in their monthly mortgage payments. Instead of your payment increasing, the amount of money going towards interest will rise, while the portion going towards principal repayment will decrease. That said, some lenders will have a trigger point at which the payments may start to increase, and it’s valuable to understand what the trigger point is.
Last week the Bank of Canada raised its key lending rate by 50 basis points, as was fully expected. That brought its policy rate up to 1.50% from 1%.
So far this year, the Bank has delivered 125-bps (1.25 percentage points) worth of tightening in an effort to control above-target inflation.
“The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored,” the BoC said in its accompanying statement.
In April, the country’s headline inflation rate rose to a 31-year high of 6.8%, driven largely by soaring food and shelter costs, according to Statistics Canada. That’s well above the Bank of Canada’s target range of 2% to 3%.
And for the first time, the central bank used more “hawkish” language to outline its future policy intentions.
“The Governing Council continues to judge that interest rates will need to rise further…[and] is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” the bank said.
A shift in future rate-hike expectations
Those words caused markets to price in more aggressive rate hikes by the end of the year, although that view isn’t shared by all.
Bond markets now expect the overnight rate to reach 3.00% by year-end, with the potential for two additional half-point hikes at the next two policy meetings in July and September.
But economists aren’t in agreement with the actual path rates might take.
“The Bank of Canada is focused on maintaining its credibility and ensuring inflation expectations remain anchored,” wrote BMO’s Benjamin Reitzes. “We continue to look for another 50-bps hike in July, but there's a risk of a 75-bps move if inflation surprises to the high side yet again.”
Others see one more 50-bps hike in July before the Bank pauses to better assess economic conditions.
“The Bank of Canada will probably have to pause its hiking cycle ahead of many other peers, given the Canadian economy’s sensitivity to higher rates,” wrote economists from Desjardins.
A key point to remember is that rate hikes aren’t permanent. And some observers are pointing out that the higher rates go, the sooner they are likely to retreat, particularly in the event of an economic slowdown or a recession.
“I think the BoC will be more cautious than the market predicts [in 2022],” noted mortgage broker Dave Larock of Integrated Mortgage Planners. “Furthermore, if the Bank hikes by more than expected, I think that will significantly increase the odds that a recession ensues and that rate cuts then follow.”
Options for anxious borrowers
Following Wednesday’s rate announcement, most of the Big 5 banks announced increases to their prime rates, which will increase from 3.20% to 3.70%.
Many variable-rate mortgage holders don’t have to worry about fluctuations in their monthly mortgage payment, since the large majority have fixed monthly payments. Instead of your payment increasing, the amount of money going towards interest cost will rise, while the portion going towards principal repayment will decrease.
Those with adjustable-rate mortgages, however, will see a rise in their monthly payments. Generally, a 50-bps increase in rates will translate into about $25 more per month per $100,000 of mortgage debt, based on a 25-year amortization.
For those concerned about rising monthly payments or what their trigger point is, a mortgage broker can review your options with you.