The eighth increase in the Bank of Canada’s key rate in less than a year will hurt holders of variable-rate residential mortgages, as well as those about to renew their rates. But then they should have some respite, as the central bank has announced its intention to take a break to assess whether further hikes are needed.
“We all expected it… but we hope it will be the last increase,” says Sylvain Poirier, president of the Quebec Mortgage Brokers Association.
The 0.25 percentage point increase announced Monday, although slight, is the latest demonstration of the muscular recovery of Canadian monetary policy intended to curb inflation.
From its floor of 0.25% hit at the start of the pandemic and maintained until the winter of 2022, the Bank of Canada’s key rate rose to 4.50% in less than a year.
“If we take the example of a $400,000 loan, this 0.25 percentage point increase adds another $1,000 to be repaid over the year,” explains Mr. Poirier. And this increase comes on top of all the others that have taken place in recent months. What expenses will people still need to reduce to repay their loan? Hobbies ? The trips? The grocery store… ? »
Limit rate
In a briefing note from the National Bank, economists Taylor Schleich, Jocelyn Paquet and Warren Lovely believe that the Bank of Canada’s current tightening is “more than enough” to bring inflation back to the target – between 1% and 3% — and that further increases are not necessary, from their point of view.
They also note that with this further increase, the share of variable rate and fixed payment mortgage holders who have reached their “limit rate” or “trigger rate” (in English: trigger rate) goes from 66% to 73%.
As a reminder, even when interest rates increase, the monthly payments for holders of a variable rate loan with fixed payments do not vary. It is the portions of the amount allocated to interest and capital that are modified.
However, when interest rates rise significantly, “holders of these loans can come to a point where their fixed payments cover only the interest, and no capital,” explains the Bank of Canada. The interest rate where this scenario materializes is called the “limit rate”.
Thus, more and more borrowers may have to increase the amount of their mortgage payments to be able to cover the additional interest.
Aspiring buyers
From the point of view of those who are currently looking to acquire a property, the Bank of Canada’s announcement can be interpreted as a reassuring signal, said Marc Lefrançois, licensed real estate broker at Royal LePage.
“The message it sends is that we are not going towards interest rates of more than 10%. She pretty much sticks to what was expected. And we should see a stabilization. So, now that potential buyers are a little reassured, seeing that we are not heading towards total disaster, they will be able to embark on the real estate market,” assesses Mr. Lefrançois.
Sylvain Poirier also sees some respite this year in terms of monetary policy. “Interest rates are expected to stabilize this year and perhaps decline slightly by year-end, or at least by next year — which will provide some respite, especially to holders of variable rate loans,” he says.
The next update of the Bank of Canada’s key rate will take place on March 8.