The unexpected decision by the Bank of Canada to raise interest rates is predicted to result in higher mortgage costs for homeowners, according to experts. With fixed rates already on the rise, the rate hike further amplifies the financial burden on those with variable-rate mortgages and home equity lines of credit (HELOCs). This article delves into the implications of the rate hike for mortgage owners and explores its potential effects on the housing market.
Higher Costs for Variable-Rate Mortgage Holders:
Variable-rate mortgage and HELOC holders, already fatigued by previous rate hikes, will experience a further increase in their interest rates. James Laird, co-CEO of Ratehub.ca and president of CanWise Mortgage Lender, emphasizes that those with fixed payments on their variable-rate mortgages are likely to exceed their trigger rate if they haven’t already. Variable-payment mortgage holders will see their monthly payments rise to accommodate the rate hike.
Impact on Fixed Rates and Bond Yields:
Ahead of the central bank’s announcement, fixed rates had already started to climb. With the rate hike, fixed rates are expected to increase even further. This is attributed to the rise in bond yields, a key factor influencing fixed-rate mortgages. Leah Zlatkin, a mortgage broker, highlights the impact of the rate hike on the Canadian five-year government bond, which often serves as an indicator for fixed rates. Many individuals with variable-rate products are now opting to switch to fixed-rate mortgages, abandoning hopes of declining rates by December.
Financial Impact on Mortgage Owners:
The rate hike’s impact on mortgage costs can be exemplified by a hypothetical scenario. Based on calculations from Ratehub.ca, a homeowner who made a 10% down payment on a $716,083 home with a five-year variable rate mortgage of 5.55% amortized over 25 years would see their monthly payment increase from $4,075 to $4,173 with the rate increase. Zlatkin advises clients to consider two- or three-year fixed-rate products to weather the market conditions.
Effects on the Housing Market:
The rate hike is expected to have repercussions on the housing market, potentially introducing uncertainty. Supply shortages and population growth had already spurred homebuying activity in Toronto and Vancouver. However, Zlatkin points out that concerns about interest rates may temper demand levels and lead to a potential oversupply situation. The extent of the effect on the housing market is yet to be determined.
Impact on Home Prices and Inflation:
The recent rate hike is anticipated to put downward pressure on home prices, which have rebounded faster than anticipated by the Bank of Canada. Experts highlight the unintended consequences of rate hikes on the mortgage market. In April’s consumer price index data, around 29% of core inflation was attributed to mortgage costs. With the rate increase potentially fueling inflation and housing costs, there could be a ripple effect on rentals and the overall economy.
Mortgage owners in Canada are bracing for higher costs following the Bank of Canada’s surprise rate hike. With variable-rate mortgages and HELOCs facing additional financial burdens many are opting for fixed-rate products. The rate hike is expected to impact the housing market, potentially leading to a shift in demand and supply dynamics. Additionally, the rate hike could have unintended effects on inflation and home prices. Mortgage owners and market participants will closely monitor developments and adjust their strategies accordingly in response to the changing interest rate landscape.
Since before the Budget Day on April 16, Prime Minister Justin Trudeau has been making announcements addressing the housing crisis facing the North American nation. From incentivizing the construction of affordable housing to reconstruction, these plans promise to improve the housing infrastructure of Canada.
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Canadian housing activity was largely stable in March, but a key spring selling season lies ahead. Existing homesales edged up 0.5% in March (seasonally adjusted) and were up a modest 1.7% from sluggish year-ago levels (although an early Easter long weekend likely reduced volumes somewhat). While current activity might seem quiet compared to the exuberance in 2021 and early 2022, sales volumes are trending about in line with pre-COVID norms, albeit at the low end of that range.
“We are changing the way we build homes in Canada. In our housing plan and Budget 2024, we are delivering ambitious action and investments to build more homes, make it easier to rent or own, and help the most vulnerable with stable housing. This is about restoring fairness for every generation, and housing is at the heart of that”, said Canadian Prime Minister, Justin Trudeau about the country’s new housing plan.
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