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The Canadian government once again raised the policy rate to 1.5%. If you want to know why, here’s the reason.
The inflation rate in Canada has been rising. Canadian provinces can prove that because of inflation, household goods purchased on a daily basis are now more expensive than they were visible to the naked eye a few months ago.
One way for the Canadian government to try to control the situation and bring it back to some form of normalcy is to raise interest rates. This quantitative tightening of economic policy is designed to curb overspending and the flow of money, which in turn fights inflation.
However, as interest rates rise, Canadians are facing higher borrowing costs. Lending rates linked to policy rates, such as variable mortgage rates, credit lines or other variable rates, are increasing and are expected to continue along this path.
Recently, fixed mortgage rates have also begun to reflect the rise in policy rates and the current state of the economy. Two years ago, five-year fixed mortgages for 25 years were as low as 2.34%. In 2022, interest rates on similar mortgage agreements are as high as 4.94%.
Higher mortgage rates are not the only housing dilemma facing ordinary Canadians. The real estate industry has been having its ups and downs, and everyone is talking about a sharp rise in housing prices.
The house price in BC province has been so high that only a few people can afford it. The current rise in house prices has aggravated the inaccessibility of house ownership.
Most people who want to buy homes are discouraged by rising house prices and rising mortgage rates. It becomes more difficult to decide whether to buy or continue to rent.
Suppose you have crossed the barrier of saving a down payment for a house. The rise in house prices and mortgage rates means two important things.
The price of the house you originally wanted to buy may have gone up, and so will the down payment you need. In addition, houses will cost more in terms of interest rate payments than they did a year ago. In essence, the same house costs more money.
In addition, you need to consider stress tests. In view of your income level, if you are eligible to buy a house of about 500000 yuan, a higher policy interest rate will make you eligible to buy a house of lower value, such as 350000 yuan.
With higher house prices and rising interest rates, buying a house means you need a higher down payment as well as higher interest rates.
As inflation increases, landlords may turn to increase rents. In fact, as of may 2022, the average rental cost of one bedroom and one living room in Vancouver increased by 18.12% year-on-year to 2334 yuan.
On the one hand, buying a house allows you to accumulate assets in real estate, but you are subject to higher house prices and catch up with higher mortgage interest payments.
On the other hand, while renting may be a more feasible option, you can only hope that landlords will not continue to raise rents significantly.
Finally, as the name implies, the personal financial decision to buy or continue to rent is personal. Owning a house brings additional financial responsibilities, such as home maintenance, property taxes and housing insurance.